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A Handbook gf Railroad Information 






Copyright 1922 

By Charles H. Kerr & Company 

Published November 15, 1922 

Printed in the United States of America 



To the wage-earning workers, 
whose labor, skiU and fidelity to 
the public's trust enable the inade- 
qvxite and brokenr-backed railroad 
system of the United States to be 
operated and me to travel on it 
about my native land, I inscribe 
these records with my humble 





The Beginnings of the Story 7 

The New York Central Lines — 

A. The New York Central & Hudson River 14 

B. The Lake Shore & Michigan Southern 45 

The Southern Pacific System — 

A. Foundations of Its Capital 62 

B. The Contract and Finance Company 71 

C. The Sunset Line .^ . . 89 

D. The Control of Government 108 

E. One Item in the Bill 139 

The Rock Island System 149 

The Cincinnati, Hamilton & Dayton— Physical Perils- 
OF Overcapitalization .' 172 

The Great Northern — ^The True Uses of Melons 188 

The Reading Company and System — The True Use of 
THE Holding Company -» 218 

The Pere Marquette — A Sample of Artistic Wreckage. 228 

The Frisco Lines— Wreckage by Syndicates 237 

The Pullman Company — A Story of Marvels 253 

The Incidentals of Capital Making — 

A. The Hocking Valley Case 272 

B. Samples from a Fruitful Field 280 

C. The Land Grant Railroads 285 

The Louisville & Nashville— The Railroad in Politics 
AND THE Government 290 

What Happened to the New Haven 301 

Conclusions and Remedies 316 




The most important facts about the American Rail- 
road System are the facts that ate least often heard 
of when we discuss our railroad problems. 

Whether they are not mentioned because they are 
not generally known or because they are intentionally 
side-stepped makes no difference. The whole subject 
hinges on them and here they are: 

1. A railroad is a highway. 

2. A highway is a public thing. Being public it 
is part of the machinery of government. Therefore 
it belongs to what is called the sovereign power. In 
a democracy sovereign power means the power of the 
government that the people have elected to represent 
them and do their will. 

3. There cannot properly be any such thing as the 
private ownership of a highway. 

4. Railroad companies do not own the highways 
they operate. All they can own is the investments 
they have made in the things with which highways 
are operated. 

5. In operating a highway a railroad company acts 
fts an agent of the government — or of the stai;e, which 


means the same thing. The highway exists only to 
serve and accommodate the public. The state can, if 
it chooses, and often does, operate the highways it- 
self. In the case of railroad highways it has been 
held in this country that they can be better operated 
by companies than by the state. Therefore the state 
makes an arrangement with the companies to do this 

6. In return for the public service that the com- 
pany, thus performs the company is entitled to com- 
pensation. This compensation may rightfully take the 
shape of a just and reasonable profit upon money the 
stockholders have invested in the enterprise.. 

7. All profits in excess of this just and reasonable 
profit belong not to the company but to the public. 
They are, in fact, public trust funds. They are earn- 
ings, not upon the property of the company, but upon 
the property of the public. The only property the 
company has is the money its stockholders have 
actually invested in the enterprise. The highway re- 
mains the property of the public. 

8. The government, acting for the public, has the 
sole right to say what use shall be made of these 
trust funds. 

9. Before the introduction of railroads, arrange- 
ments of this kind were made with companies that 
operated turn-pike highways. In such cases it was 
usual to return to the public all profits in excess of 
the rate fixed as just and reasonable compensation. 

10. This was done by reducing the tolls or turn- 
pike rates that the public must pay. 

11. The railroads took the places of the turn-pike. 
In principle they were not different. 


The foregoing is the true relation of a railroad 
company to the public. The notion that there is or 
can be any other kind of relation between these two 
is the mere product of busy propaganda. It has no 
basis in fact. A highway is" always a highway so 
long as it is open to public transit. It is always "a 
specified line of travel," which is the standard defini- 
tion of a highway. A highway does not cease to be a 
highway because two steel rails are laid down upon it 
or because the vehicles the public uses upon it are of 
one pattern. 

• It is not merely custom that makes a highway an 
institution of the government or the state. Govern- 
ments could not exist on any other basis. This be- 
comes clear as soon as we stop to think about govern- 
ment as it rieally is. The government of more than 
one person can be carried on only by means of com- 
munication. I can govern myself without communi- n 
cation but I cannot govern anybody else without it. 
Plainly enough then, any power that controls com- 
munication is the power that governs. Because it 
controls communication it becomes in reality the 
sovereign, no matter what it may be called. 

This fact is shown and always has been shown in 
war. When an army invades some other country's 
territory it tries first to seize the highways. When it 
gets these it gets everything else. 

This leaves just two ways of looking at the relations 
between the railroads and the government. The 
government owns the highways and the railroad 
companies are the government's agents to operate 
them. Or the railroad companies own the highways, 
are the sovereign power and no Congress, Legislature 



nor Interstate Commerce Commission has any right to 
limit them or interfere with them in any way. They 
can charge what rates they please, run their trains 
as they please, pay what wages they please and they 
can summon the military power of the nation to en- 
force their will. 

Between these two theories there is nothing. No- 
body has suggested or can suggest a middle ground. 
It is one thing or the other. The American courts 
have again and again upheld the first theory, the 
idea that the government is the sovereign power anji 
the companies are its agents. The railroad com- 
panies themselves no longer openly contest it. They 
seek 'only to dodge it and belittle it and pervert it, 
trying, in spite of all to insinuate and proceed upon 
the theory that they are owners of the highways. 

It is to this attempt that we owe a large part of 
our railroad problem. 

Highways are public not private. Railroad com- 
panies are agents, not sovereigns. Railroad rates 
and fares are taxes levied upon the public to collect 
for the operating agents (which are the railroad com- 
panies) a reasonable compensation for their services. 
^When these rates and fares collect more than that 
reasonable compensation, the excess belongs not to 
the companies but to the public. 

When railroads began to supersede turnpikes as 
an improved means of transportation these facts were 
still recognized. The first railroads were built with 
public funds as public institutions. 

But before long in two countries of the world, the 
United States and Great Britain, these facts began 
to be obscured. Another idea grew up about rail- 


■> • 

roads. In both countries certain practices came to 
be^ common that utterly denied and trampled upon 
the ancient principles about highways. These prac- 
tices grew in boldness and extent until they were the 
most startling and dazzling chapter in the history of 
the world's finance. Sometimes the operations they 
involved were criminal, sometimes semi-criminal, 
sometimes merely immoral. The swiftness with which 
they brought fortune eclipsed every other consider- 
ation about them and made them the unequalled 
romances of commerce. No gold mine ever made 
men rich with the like rapidity. They had all the 
fascination of treasure hunting with much greater 

They left behind, however, certain consequences 
that have profoundly affected this generation and 
continue to affect it. 

It is only because of these practices that we have 
now in this country any such thing as a railroad 
problem. Not one phase or part of that problem is 
due to ansrthing else. 

About any other kind of history we can be as in- 
different as we like. Something that happened fifty 
years ago in politics or on a battlefield we can read 
about and forget. It was fifty years ^ago — ^what of 
it? The actors' are all dead. The scenes are all 
changed; let us think about something else. But 
about these chapters of railroad history it is dif- 
ferent. We cannot shove them aside with the notion 
that they belonged to our grandfathers' times. They 
are not really records of by-gone events. They are 
accounts of something that happened yesterday, is 


happening today and will happen tomorrow to every- 
one of us. 

The men that did these things have passed out of 
sight. The things they did remain and come to tax 
and perplex us all day and look into the window all 
night. Nothing I shall read in any newspaper today 
about anything else, no matter with how big a head- 
line it may be printed, will mean as much to me in 
so many different ways as the practices that grew up 
in this country when railroad companies began to 
evade the ancient principles of the highway. 

I purpose therefore to tell in the pages following 
these stories of financial adventure exactly as they 

To that vast majority of the population that earns 
daily bread by daily exertion, this will be a narrative 
of strong personal interest. Three classes in that 
majority first of all ought to find it particularly ab- 

First, the railroad workers. They will find in it 
the reason for all the troubles they have had or are 
likely to have with the company that employs them. 
They will find in it no less the reason why their wages 
yield them so little beyond the barest necessities of 

Next, the vast aggregation of householders of 
limited means. They will find here the exact reason 
why, no matter how much prices may fall at the 
farm and for the stock-raiser, the cost of living is 
always so far above the range of those prices. 

Third, the farmers. For they will understand from 
these records why they get so small a share of the 
high price the householder pays for farm products. 


The traveler, also, may take some note, after these, 
for he will understand why the price of his tickets 
has doubled in twelve years. The shipper may read 
with advantage because he will be enlightened here 
about his freight bills. In fact, there is scarcely an 
element in the country that cannot with profit and 
gratification peruse the simple annals of our railroad 
history — except the element, small in numbers, that 
continues to reap in one way or another the fat re- 
wards of these sinister achievements. 

With this explanation, we are ready to begin the 
history and will start, if you please, with a railroad 
famous and eminently respectable. 



A. The New York Central & Hudson River. 

Rather more than seventy years ago there were 
dwelling in the City of Syracuse, New York, certain 
gentlemen firmly convinced that all the graft had not 
yet been gathered from the railroad business. 

Yet to the casual eye the tree must have appeared 
to be fairly well picked by the ambitious financiers of 
that day. 

The State of New York and many counties and 
towns therein had gone to the length of lending to 
various gentlemen large funds from the public 
treasuries to build lines of railroad in many directions. 

These loans had amounted to the nifty total of 
$50,048,496. The innocent idea of the public officers 
had been that the sums thus advanced should be re- 
paid to the public treasuries from which they had 
been taken. 

The gentlemen that had been thus benefited at 
public expense had another idea about that. They 
never repaid any of the loans. 

With the money of the public they had built rail- 
road lines. These lines they had taken for their own 
private property, keeping also the money with which 
the roads had been built. 

The inappreciative public Had not viewed these 
things with enthusiasm. To be despoiled of its funds 


to make railroads for individual profit met with little 
applause and there was a general notion growing up 
that this order of benevolence had gone far enough. 

This was why so many persons thought the Good 
Things had been about picked off the railroad tree. 

The gentlemen of Syracuse, on the contrary, had a 
notion that such Good Things were only beginning. 

It was about the year 1850. The railroad com- 
panies of the day were small affairs compared with 
ours. Eight of them, endowed with funds from the 
public treasuries, had built eight separate lines con- 
necting various cities between Albany and Buffalo, so 
that there was a continuous railroad highway but in 
eight separate sections. 

Oner of these sections was the Syracuse & Utica 
Railroad Company which had the line between these 
cities. It had been built with public aid. 

The hopeful gentlemen who were not in on this 
Good Thing formed a new company, ostensibly to 
compete with the older line. It was called the 
Syracuse & Utica Direct, and had a capital of $600,- 
000, none of which was ever paid in. 

All of its possessions consisted of a franchise, 
some marks on a map, and much hope. 

About the same time certain other gentlemen were 
engaged in unifying and consolidating the eight 
separate links of railroad companies between Albany 
and Buffalo. 

The hopeful ones of Syracuse rang themselves in 
on this deal with their Syracuse & Utica Direct, 
their franchise, marks on a map and capital stock 
that had never been paid in. They threatened, if they 
were not admitted, to upset the whole arrangement by 


building their road and competing. This did the busi- 

For their $600,000 of stock for which they had 
never paid a cent and which represented no invest- 
ment in anything but hot air and hopes, they re- 
ceived $600,000 of veritable stock in the new com- 
pany that was being formed, and $300,000 of what 
were called "premium bonds" of the same new com- 

It was the amalgamation of these separate links 
and was called the New York Central. 

Nominally ten companies formed the consolidation. 
Of these eight were veritable concerns and had tracks 
and cars and stations. The others were fake enter- 
prises. Besides the Syracuse & Utica Direct there 
was the Mohawk Valley, a similar dream, but having 
a capitalization of $1,575,000 — ^none of which was 
paid in. 

It also had possessions consisting of a franchise, 
marks on a map and hopes. It therefore, had some- 
thing to threaten with. 

The eight that were real had each on its own ac- 
count already an ample supply of water in its capi- 
talization. Each had stocks that had never been paid 
for or bpnds that represented no investment, or both. 

Having been assisted, most of them, with public 
funds never repaid, they had thus in hand a Great 
Good Thing when the consolidation was suggested. 

To make the consolidation the easier the new com- 
pany, it was planned — ^that is, the New York Cen- 
tral—should issue $9,000,000 of "premium bonds" 
and these should be distributed free of charge to the 
stockholders of the railroads forming the combi- 


nation. This meant $9,000,000 of additional water 
or fictitious capital. 

Here is the way the capitalization looked after this 
liberal application of the financial watering pot : 



Share Percent- Amount of 

Capital age of Premium 

Including Bonds Bonds 

Original Railroad Water Allowed All Water 

Albany & Schnectady $1,621,800 17 $275,706 

Schenectady & Troy 650,000 .. 

Utica & Schenectady 4,500,000 55 2,777,000 

Mohawk Valley* 1,575,000 55 888,250 

Syracuse & Utica 2,700,000 50 1,350,000 

Syracuse & Utica Direct*.... 600,000 50 300,000 

Rochester & Syracuse 5,608,700 30 1,682,610 

Buffalo & Rochester 3,000,000 40 1,200,000 

Rochester, Lockport & Niagara 

Falls 2,155,000 25 538,750 

Buffalo & Lockport 675,000 25 168,750 

Total $23,085,600 $9,181,066 

*Fake enterprises. 

The Schenectady & Troy received no "premium 
bonds" and was penalized in a 25 per cent discpunt 
when the new stock of the consolidated railroad was 
issued. It was financially the weak sister of the com- 

These shiftings made the actual capital stock — ^not 
bonds — of the new company $22,923,000. 

Of this sum much more than one-half was fictitious 
and represented no investment of any kind in any- 


The $9,191,066 of "premium bonds" issued to grease 
the ways for this consolidation became a part of the 
new company's indebtedness, in which capacity they 
performed antics in the annual reports that to this 
day dazzle every beholder. 

To provide for them, account for them and conceal 
their real purpose, the books of the New York Central 
were cooked and for the next twenty-five years con- 
tinued to be cooked annually. 

In that time the company never returned a state- 
ment fto the government of the State* of New York that 
was correct. For more than twenty-five years these 
"premiuin bonds" were carried on the company's books 
as an asset, disguised as "debt certificates" and left 
without other explanation. As a matter of fact they 
should have been charged to profit and loss. However, 
this was all in the day's work for the railroad exploi- 
ters of those times. As we shall see, they cooked books 
or burned them or buried them as occasion might de- 

But however the presence of these "premium bonds" 
might be concealed by the accomplished book cooks of 
the New York Central they were in the capitalization, 
and are there now. From that day to this they have 
been a part of that total on which rates are based, 
increases demanded and wages determined. On this 
$9,000,000 of capitalization thus created out of noth- 
ing, we, the public, have so far paid $31,500,000. We 
have paid it in passenger and freight rates taken from 
us to pay the annual interest charges on these bonds. 
On the $900,000 of the same bonds delivered to the 
fictitious Syracuse & Utica Direct in exchange for its 
mark on a map, we have paid $3,150,000. the $600,000 


of its fictitious stock has cost us so far $2,100,000 — all 
for the stroke of a pen. 

The hopeful gentlemen had reason for their hopes. 
Instead of the graft being out of the railroad business, 
it was just beginning. 

Those of the Mohawk Valley dream fared relatively 
as well. For their marks oh a map and bounding hopes 
they received $2,463,250, a sum that has been charged 
up to us ever since, for it too is still a part of the cap- 
italization on which rates are charged to us and wages 

Between New York City and Albany was at this 
time another railroad called the Hudson River. It like- 
wise had been formed by the consolidation of smaller 
links, and in this case also the consolidation had been 
effected with fictitious securities added to the capitali- 

In 1869 its capital stock was $6,962,971, of which 
about one-third was actual investment of actual money. 
The rest was "premium bonds", stock dividends, marks 
on maps and other assets of fairy land. A stock divi- 
dend, which means the free present of more stock to 
persons already stockholders, had just been made. It 
increased the capitalization without increasing by a 
cent the amount of money invested in the enterprise. 
It also increased the basis upon which always there- 
after the passenger and freight rates were to be calcu- 
lated and wages regulated. 

Railroad capitalization consists of stocks and bonds. 
Stocks are certificates of a right to share in the profits 
of the enterprise, if there are any profits, and a right 
to a vote in the control of the company's affairs. Bonds 
are mortgages on the property of the company but 


carry no right to share in the profits nor the controL 
Bonds bear a fixed rate of interest. Stocks bear no 
fixed rate of interest, but dividends are declared upon 
them at rates the directors determine according to the 
profits, or alleged profits, or otherwise. 

The interest on bonds must be paid as specified or 
the bondholders may foreclose the mortgage and seize 
the property. An effort has been made for many years 
to create the belief that dividends on stock are equally 
obligatory. It has succeeded to this extent that the 
courts have upheld the doctrine that railroad stock- 
holders are entitled to a fair return upon the invest- 
ment in the property. 

This lias been so twisted and distorted that many 
now assume it to mean a return upon the total nomi- 
nal stock capital, whatever that may be or however it 
may have been created. 

As a matter of fact, if the ancient principle of the 
highway had been adhered to, it could mean only the 
actual money actually invested in an enterprise. 

Under this principle, two-thirds of the capitaliza- 
tion of the Hudson River Railroad was entitied to no 
return whatever for it was not money actually invested 
in the enterprise but only securities presented as gifts 
to the stockholders. 

Because of this distortion of meaning, the fictitious 
stock issued to the stockholders of the Hudson River 
Railroad is still a part of the capitalization of the line 
"^nd forms part of the basis for rates and wages in the 
disputes and issues of today. 

Commodore Cornelius Vanderbilt, the original 
founder of the Vanderbilt fortune, now came into the 
story. He had turned his attention from steam-boat- 


ing to railroad stocks and had made a historic and cor- 
rupt deal by which he had secured enough stock to 
control the old New York & Harlem, a line then inde- 
pendent of the Hudson River Railroad. It entered 
New York City on the east side and the Hudson River 
entered it on the west. 

With the money he made in this deal, Vanderbilt 
bought into the Hudson River lipe until he was able to 
control that also. Soon after, he engineered a bejir 
raid, frightened the stockholders of the New York 
Central, picked up the holdings of the timid and be- 
came the ihaster spirit of that road also. 

In both companies the secret of making railroad for- 
tunes had been fairly well understood before his time, 
but he soon showed the experts of that day some new 
tricks that astonished them. 

In 1865 the capital stock of the New York Central 
had become $24,136,661, of which a considerable part 
had lately been added as stock issued against surplus 

This also is merely watering. The company piles up 
a surplus beyond its dividend requirements and inter- 
est charges. If the principle of the highway had not 
been abandoned, this surplus would have been regard- 
ed as belonging to the public and to be returned to the 
public in the shape of reduced tolls. In this case it 
was not returned to the public but stock equal to the 
amount of the surplus was issued freely to the stock- 
holders, and thus added to the capitalization. 

Upon this addition also the next year dividends 
must be earned, although it represented no addition 
to the actual investment in the actual enterprise. 

Besides this, there had been issued $6,200,000 of 


bonds convertible into stock. The bonds bore a low 
rate of interest; the stock was paying a high rate of 
dividends. To convert the bonds into stock was equiv- 
alent to making another present to the stockholders. 

Three years later still further issues had brought 
the capitalization to $25,795,000 of which, more than 
three-quarters was water. 

On watered stock and all the New York Central paid 
dividends of six per cent, in 1854; 1855, 1856, 1857; 
seven per cent in 1858 and 1859 ; eight per cent in each 
year from 1859 to 1865 and nine per cent in 1866 and 

In 1867 this same railroad, making then nine per 
cent dividends, petitioned the legislature for permis- 
sion to increase its passenger rates on the ground that 
at the existing rates it could not earn "a just and rea- 
sonable profit". 

I emphasize this fact to show how old is this plea 
and how baseless. On all the money ever invested in 
the enterprise it was then paying more than 60 per 
cent a year. 

By means of many issues of securities never paid 
for, by clever bookkeeping, by fictitious issues of cap- 
italization the real profits were concealed and with 
huge effrontery more profits were demanded. I think 
it is worthy of much attention that then as now the 
device worked effectively. The legislature granted the 
increase and legalized the toll levied upon the public 
in the name of this fictitious capitalization. 

Meanwhile the Hudson River Railroad had a capital 
stock of $6,962,971 (liberally watered) on which it 
was paying nine per cent dividends. 

In 1868 this railroad performed an act then rather 


new in the railroad business but since become so 
common it no longer attracts much attention. It "cut 
a watermelon" for the benefit of its stockholders. It 
doubled its stock, the new issue being put out to its 
stockholders at 50 cents on the dollar when it was 
worth more than pai*. 

This is the meaning of ''cutting a melon'* in the 
phrase of the stock market. Something for nothing 
for the benefit of the Insiders is the essence of it. 
Melons line the whole inside of the railroad capitaliza- 
tion of Anierica. They have made some persons very 
rich. The trouble with them is that in every instance 
they become an addition to that capitalization on which 
interest must be paid and dividends provided. 

As the money to pay interest and provide dividends 
can be obtained only by levying passenger and freight 
rates and by squeezing wages, every melon, however 
fair to look upon in the eyes of the lucky stockholder, 
is a public burden that is carried long after the lucky 
stockholder has gone to his account. 

This is one of the pertinent railroad facts that the 
railroad press diligently obscures. Yet it reaches to 
the pocket of every family in America. 

Every melon that has ever been cut in the railroad 
history of the United States is still in the capitalization 
of oiir railroad system and has its direct relation to 
both rates and wages. 

With the money derived from this stock issue at 
one-half its real value, the company bought St. John's 
Park, New York City, and destroyed the most beau- 
tiful pleasure ground in America. Total capital $13,- 
900,000, more than half water. 

The word "water" is one most unpleasant in railroad 


ears. It means capitalization that does not represent 
actual investment of actual money but is added in 
other ways. Determined efforts have been made to 
create the impression that it means excess of capitali- 
zation beyond the value of the property. It means 
nothing of the kind but only fictitious capitalization 
however created. With the value of the property it 
has nothing to do— and neither have we. 

In both roads Commodore Vanderbilt had become 
the controlling influence. He was now to give a start- 
ling exhibition of his powers as a manipulator and 
sleight-of-hand performer with railroad properties. 

Late on the night of December 19, 1868, the direc- 
tors of the New York Central met secretly at his house. 
There they voted first on the. outstanding stock of the 
railroad a cash dividend equal to seven and two-tenths 
per cent. Then they voted to each stockholder free 
additional stock to the extent of eighty per cent of his 
holdings at the time. 

"Interest certificates" to provide for this huge graft 
and to be exchanged later for stock had been printed 
and prepared in advance. They were signed on the 
spot and each director annexed his share of the loot. 

What Vanderbilt got amounted for those days to a 
staggering fortune and laid the foundation for others 
in the same family that still persist and mount up- 

Some news of this remarkable performance seems to 
have leaked out the next day, which was* Sunday. Be- 
fore daylight Monday morning an injunction was 
served upon the treasurer of the company restraining 
him from issuing the "interest certificates" which 



stood in lieu of stock. It came too late. They were 
already issued. 

Even Wall Street gasped and revolted at this bold 
exploit. The ostensible excuse for the enormous melon 
was that the company had large surplus earnings, 
many improvements and great real estate investments 
to be capitalized and this was the way to capitalize 
them. The leading financial journal of that day 
pointed out that these assertions were utterly false. 
There could be no surplus because the total sur- 
plus earnings in fourteen years had been only 
$5,000,000 and these had been already capitalized. 
There were no improvements great real estate 
investments. The whole story, therefore, was merely 
an example of the sheer fraud and iron-faced lying 
that have always attended the railroad business in the 
United States. The men on the Inside had merely lied 
to the public while they rifled the public's pockets. 

Yet the money obtained in this way was not all of 
the melons that graced the festive board on this occa- 
sion. Mr. Vanderbilt had quietly organized a little 
pool composed chiefly of members of his own family. 
He deposited in London $7,000,000 of New York Cen- 
tral stock as security for a loan wherewith to work 
his purposes. He then drove down the price of the 
stock from 135 to 84. This shook out the small holders 
and he picked up what they dropped, his total pur- 
chases being made at an average of ninety. When all 
the timid ones had fled he held his secret meeting, de- 
clared the cash dividend of 7 2/10 per cent and the 
stock dividend of 20 per cent, grabbed his certificates 
and locked them up in his safe. 

Up bounded the stock like a balloon. 


By these operations be made first $4,200,000 profit 
on the $7,000,000 of stock he had deposited for col- 
lateral; he had with a printing press almost doubled 
his fortune; and he now held all the stock the timid 
ones dropped in the decline he himself had caused. 

Remember this incident the next time you find some 
newspaper or Congressional railroad lackey viewing 
railroad capitalization as some kind of Sacred White 
Cow. This is all there is sacred about it — ^the cunning 
to play tricks and the hardihood to get away with 

Times were different then. It was no crime to criti- 
cise the rich and their methods. Commodore Vander- 
bilt by no means escaped without public scorn and 

"Either," declared a prominent Waft Street journal, 
"the New York Central has had a much larger surplus 
income than appeared from its annual reports and the 
present dividend fairly represents it, or the represen- 
tations of surplus earnings are fictitious and the divi- 
dend is unwarranted." In either ease one would think 
the operation about on a par with safe-blowing' or sec- 
ond-story work. 

But expressions of public resentment availed not to 
check the melon-cutting. They never do. 

All things being now prepared. Head Gardener Van- 
derbilt brought in the next fruit, being the consolida- 
tion of the Hudson River and the New York Central 
railroads, planned before the secret meeting at. his 

The manner in which this scandalous deal was car- 
ried out ig worth your attention; particularly as you 
have paid for it ever since. 


First, a new company was formed, the New York 
Central & Hudson River, with capital stock of $45,- 
000,000, being 450,000 shares of $100 each. Of this 
the stockholders of the New York Central received 
$28,972,000 and the stockholders of the Hudson Riyer 
$16,028,000. So far, good. But this left the $22,500,- 
000 of "interest certificates", the flood of water that 
had been issued at the secret meeting at Commodore 
Vanderbilt's house, December 19. These were now 
provided for. The directors of the new company 
had been authorized to issue additional stock. They 
issued enough to enable the "interest certificates" to 
be exchanged into stock at par. 

When this had been done it appeared that the stock- 
holders of the Hudson River had really received $29,- 
651,800 for their $13,900,000 of stock in the, old com- 
pany, while for their $28,795,000 the stockholders of 
the New York Central had received $59,605,650. In 
each instance the excess represented not one cent of 
investment but only insatiable greed and the rank 
misuse of the power to tax the public. Total capital- 
ization of the new company $89,257,450. Water upon 
water and then more water. 

The authorization of the new issue by which this 
result was achieved was so worded that while ostensi- 
bly it meant one thing, another and a very different 
meaning could be drawn from it. So great was this 
inconsistency that ever since thoughtful men have 
questioned the validity of the issue, and wondered what 
the courts would do about it if it should be brought to 
their attention. 

Of the huge accumulation of water in the $89,257,- 
450 of capitalization more than $50,000,000 consisted 


of securities that were merely gifts of Cornelius Van- 
derbilt to himself and his family. 

On this fictitious capitalization, amounting to a sum 
that seems to the reflective mind not less than colossal, 
the public has ever since continued to pay 5, 6 and 7 
per cent a year. 

To such a sordid and repulsive story nothing was 
lacking but rotten bookkeeping, and this was presently 
supplied. The water in the $89,257,450 of new capi- 
talization included $44,428,000 of "consolidation cer- 
titficates". For twenty-five years the annual reports 
of the Company were obliged to juggle with this item. 
Therefore every year $31,157,904 of the $44,428,000 
was shoved into the "cost of construction" table along 
with buildings, bridges and the like. The remainder 
must have been divided among the other departments 
-^"oil account", maybe, or "coal" or "stationery". 

Such are the difficulties (and dangers) pertaining to 
this branch of horticultural effort. 

Meantime, the watermelon was by no means the only 
produce that added millions to the fortunes of the In- 
siders. There were the fast freight line and the ex- 
press company, both fertile in illegitimate profits. 

The fast freight line largely disappeared after a 
legislative committee had turned upon it a certain light 
of investigation (in which it presented a very unwhole- 
some appearance), but for many years it had been 
operated with great success. This was the manner of 
it. The gentlemen in control of the New York Central 
and allied railroads organized a fast freight company 
with themselves as the sole stockholders. Then they 
made a contract between themselves as the fast freight 
company and themselves as directors of the New York- 

¥&£: New YOBK CENTttAL LINES 29 

Central by which the fast freight cars were carried 
with greater speed than other cars and on terms ex- 
ceedingly and unfairly advantageous to the fast freight 
company. Then they charged the public additional 
rates for carrying commodities in these cars and raked 
off the profits, which were enormous. 

If a shipper wished to have his goods forwarded 
, with any reasonable celerity, he must ship by one of 
these fast freight lines, and pay the toll to the Insid- 
ers. Otherwise his shipment would be subject to delay. 
So-called "Red Lines", "Blue Lines", "White Lines", 
gave an appearance of competition to this nefarious 
traffic. As a matter of fact all were owned by the same 
Insiders and all represented swindles on the public 
and on the small stockholders of the railroads. 

Another profitable device was the express contract, 
which, rather strangely, still survives in spite of pub- 
lic opinion. Cars of the express companies were hauled 
by the railroads at low rates, enabling the express com- 
panies which were owned exclusively by the railroad 
Insiders, to reap great profits. The Vanderbilt fam- 
ily owned some years ago, thirty thousand shares of 
American Express stock. In the Merchant's Despatch 
Transportation Company, another favorite concern, 
the same family owned twenty-four thousand of the 
thirty thousand shares. This singular institution, the 
exact utility of which was never disclosed, was not long 
ago earning forty per cent annual dividends on stock 
only one-fourth of which had been paid for, and earn- 
ing these returns chiefly by means of the favorable 
contracts with the New York Central lines. 

Similar observations apply to the relations between 
the New York Central railroad and the old Wagner 

30 raiLboad melons, rates and wages 

Sleeping Car Company, a concern owned almost en- 
tirely by the Vanderbilts. A committee of the legisla- 
ture once looked into the arrangement between the 
railroad and this company and made some exceedingly 
pertinent comments thereon, but nothing ever came of 
its findings. The Wagner Company made for its own- 
ers ten per cent a year, chiefly because of the contract 
that its owners had made with themselves as directors 
of the New York Central. In 1900, the Wagner Com- 
pany was merged with the Pullman on favorable terms 
to the Vanderbilts, who became large stockholders in 
the amalgamated company. In 1907, the statement 
was made that the company, since the consolidation, 
had made annual dividends of thirty per cent a year 
in stock and cash. 

There is a famous old castle and country seat in 
England called Blenheim. It is the ancient seat of the 
Dukes of Marlborough. In recent times it had fallen 
into decay because of the poverty of the ducal family. 
In 1896 the reigning Duke married a Vanderbilt. 
Then the poor old castle was repaired and refurbished 
in lavish style with the money of the Vander- 
bilt family, made in the manner thus described. It 
is pleasant to reflect upon this fact whenever there is 
agitation for an increase of freight or passenger rates. 
At least we can know Vhat becomes of some of the 
money thus taken from us. More than that, we can 
actually see it. Visitors are admitted to a view of 
Blenheim at a trifling charge each. 

Besides fast freight, express and sleeping car graft, 
takings were goodly for this tribe in other lines of en- 
deavor. There was the Albany bridge and there was 
the Spuyten Duyvil & Port Morris Railroad.^ 


The small steel bridge across the Hudson River at 
Albany was for many years owned by a separate com- 
pany, of which the Vanderbilt family were the chief 
stockholders, and that sturdy and famous champion of 
commercial idealism, Chauncey M. Depew, was presi- 
dent. This company had a contract with the New 
York Central (which used the bridge as an approach 
to Albany station) by which the bridge company col- 
lected approximately ten cents for every passenger 
carried across the bridge, with other tolls for freight 
cars. The profits under this arrangement were goodly. 
As a matter of most obvious fact the railroad company 
should have built and owned the bridge, but the other 
company was interposed as a convenient form of 
"benefit". About 1906, after festering twenty-five 
years or so, this scandal came to a head in the New 
York legislature and the bridge company disappeared. 

The Spuyten Duyvil & Port Morris railroad was a 
piece of connecting track across what is now upper 
New York City. The New York & Harlem came down 
on the east side to Grand Central station or near it. 
The Hudson River Railroad came down on the west 
side to Thirtieth street. The connecting track enabled 
the Hudson River trains, after V«nderbilt had come 
into control of both roads, to get into the Grand Cen- 
tral. Vanderbilt organized a company with himself 
owning practically all the stock, to hold this connecting 
track. Then he leased it from himself as the Spuyten 
Duyvil & Port Morris Railroad Company to himself as 
the boss of the Hudson River Railroad Company at a 
preposterous rental, collected the rents and charged 
them to operating expenses. 

In 1909 this interesting arrangement was still in 


existence, but being assailed bitterly by the muckrak- 
ers, with whom our fair land was then cursed, the New 
York Central pretended to buy out the interest of the 
Vanderbilt heirs and the Spuyten Duyvil & Port Mor- 
ris Railroad, that famed thoroughfare of travel, was 
wound up and disappeared. 

In effect, what the New York Central did was to 
issue new bonds, a raft of them, for which the stocTc 
of the fake railroad company was exchanged. 

In other words, while the name of the thing had dis- 
appeared, its ghost still walked collecting revenue as 
before — from you and me. It is still walking and still 
one of the reasons why freight and passenger rates 
must be high and wages must be low to meet the needs 
of capitalization — ^made in this way. 

Many suggestive facts were revealed by the forgot- 
ten investigating committee to which I have referred. 
For instance, the committee learned that peculiar rela- 
tions existed between the New York Central and' the 
Standard Oil Company, that a member of the Vander- 
bilt family had been made a large stockholder in the oil 
company, that the railroad company gave Jo the oil 
company very heavy rebates. The committee also 
learned that for years the Insiders had made great 
sums of money by the grossest discriminations in 
freight rates. Among the curious and coincident reve- 
lations was the fact that the railroad Insiders had 
aided to build the great fortune of A. T. Stewart, cele- 
brated as the most successful merchant of his time in 
New York, and that his fortune had not been the prod- 
uct of any phenomenal ability on Stewart's part, but 
chiefly resulted from a system of freight rates ar- 
ranged by and participated in by the gentlemen that 


managed the New York Centrars affairs. Ability! 
As a matter of fact, the ability required to make money 
in this way is less than the ability required to play suc- 
cessfully with marked cards or loaded dice or to bet 
on a foreknown result. 

Returning to the chronicle of New York Central 
finance, we find that in 1873 more bonds were issued 
to lay two additional tracks from Albany to Buffalo, 
and the same year the New York & Harlem Railroad 
was leased, wHereby the New York Central obtained 
possession of the Grand Central terminal in New York 
City, and 20,000 shares of Harlem stock that never had 
been issued. 

In 1877 Commodore Vanderbilt died and was suc- 
ceeded by his son, William H., the originator of the 
most famous (and significant) phrase in railroad his- 
tory — "the public be damned". Two years later, the 
world had a chance to learn how much the various 
secret money-making operations had meant to the Van- 
derbilt fortune. William H. Vanderbilt sold $35,000,- 
000 of New York Central stock at $130 a share, and 
remarked that he still held more than half of his hold- 
ings. Never has money been more easily made. The 
original cash, investment in the enterprise had been 
supplied from public funds that were never returned. 
The tot^l capital stock was now $89,257,450, mostly 
representing water and watermelons. It was extract- 
ing from the public 5 to 8 per cent a year on this. 
Without risk, without investment, without effort or 
labor, the happy possessors of this strange concern 
levied tribute and grew rich. 

The financial policy of the road was now firmly 
established. Year by year it piled up surplus earnings 


and concealed and absorbed them through capitalized 
"improvement^" and investments. Year by year it 
extended itself by purchasing outlying or competing 
systems, making each purchase the occasion for more 
water and more profit for the Insiders. Once, to be 
sure, in the case of the West Shore Railroad, compe- 
tition forced it into the purchase of a huge unprofitable 
property constituting a drain on the rest of the enter- 
prise; but in the main the money-making machine 
grew steadily, and as steadily increased the burden of 
the public that supported it. In 1887 and 1888, the 
company absorbed more than $5,000,000 of surplus 
earnings "in improvements". In 1890 it issued $15,- 
000,000 of four per cent debenture bonds, a great part 
of which was subsequently redeemed out of the sur- 
plus earnings. The next year it absorbed the Rome, 
Watertown & Ogdensburg Railroad, liberally watered 
the stock for the benefit of the Insiders and then guar- 
anteed five per cent on the stock so watered — ^held by 
the same Insiders. In 1893 the capital stock was 
flooded up to $100,000,000, the increase being issued 
to stockholders at par. And so on. 

Some of these operations represented melons to the 

Much grander melons were to come. 

The gentlemen on the Inside had long owned con- 
trolling interests in the Lake Shore & Michigan South- 
ern and the Michigan Central Railroads — interests 
purchased with the surplus and by-profits of the New 
York Central. 

They now issued $100,000,000 of New York Central 
bonds, and with them ostensibly "bought" the $50,- 
000,000 of Lake Shore stock. 


That is they themselves owning the Lake Shore stock, 
exchanged each share of it for two New York Central 
bonds having the same par value as the stock. This 
fine, ripe melon added $50,000^000 to the capitalization 
(and to the burden that the public must bear)-, and 
gave to the fortunes of the Insiders a magnificent addi- 
tion for which they had paid not a cent* 

At the same time they exchanged $18,738,000 of 
Michigan Central stock for $21,550,000 of New York 
Central bonds — a neat little melon of $2,812,000, like- 
wise planted upon the public patience. 

One trifling circumstance had long stood in the way 
of this operation. It was illegal. Therefore the gen- 
tlemen on the Inside' had the law changed. About ten 
words inserted by the obedient legislature in a statute 
of the State of New York did the business. One au- 
thority has placed the cost of this addition at $500,000. 
Ten words, $500,000; $50,000 a word. This is the 
highest rate ever paid for writing and should dispose 
of the sneer that great wealth is indifferent to litera- 

Meanwhile the good old game went on with undimin- 
ished ardor, the absorbing of outlying roads by water- 
ing stock already overflowing with water, and the cap- 
italizing or concealing of earnings. In 1898, the man- 
agement took care of $1,345,948 of surplus earnings 
by charging them to "extraordinary expenses and ad- 
ditions to property" — not specified. In 1899 the finan- 
cial Moses struck the rocks again and out gushed $15,- 
000,000 of new stock, issued to stockholders at par; 
market value, 137; melon, $5,550,000. In 1900 the 
management sopped up $1,691,060, of surplus earnings 
as "extraordinary expenses" (unexplained) and 


$2,000,000 in a ''special improvements fund" — possibly 
having an ethical purpose, none other being specified. 
Some of the railroads and securities purchased vdth 
surplus earnings, cost a pretty sum ($23,000,000 in one 
year) and yet the enterprise earned five per cent divi- 
dends on the stock, the annual deficit on the West 
Shore bonds and the rest of the fancy financiering. 
It was a community both patient and rich that was 
worked for these things. 

The real purpose of the juggling book-keeping here 
disclosed may not be apparent. After the regular 
dividends had been paid on the huge capitalization, so 
largely fictitious, there remained each year a surplus. 
To prevent unpleasant remark it was necessary to 
conceal this under somethings that would seem to ac- 
count for it but still leave it available for future di- 
vision. It was therefore charged off on the books to 
"special improvements" or "extraordinary expenses." 
In four or five years the total excess profits thus con- 
cealed might be $10,000,000. This sum was then taken 
up by a melon or the issuing of more stock ^o the 
stockholders. In this way the excess profits were 
distributed without attracting attention. 

Every time a new property was bought, there was 
more water, and between water issues ripened the 
luscious melon. Thus, in 1902, $35,000,000 of addi- 
tional stock was authorized, one-half to be held in the 
directors discretion, and the other half issued to stock- 
holders at 125. The market price was 163, and the 
melon $6,650,000. In the four years ending with 1903, 
there had been absorbed into the capitalization $7,000,- 
000 of surplus earnings, disguised under the heads of 
"betterments", "extensions", and so on, all constituting 


water. In 1904 the company charged off to operating 
expenses $3,196,452 of additions and replacements, 
and set aside $1,500,000 of another "special improve- 
ment fund" (also possibly ethical). These are but 
samples of the goodly fruitage. 

The company now went into the trolley field and used 
millions of surplus earnings in the purchase of various 
trolley lines. Additional capitalizations seem to have 
reached the balance sheet under the head of "extraor- 
dinary expenditures" — ^which they certainly were. In 
1905 the directors issued the remaining $17,500,000 of 
stock to stockholders at par, market 150; melon 
$8,750,000. As an example of what the management 
was doing meanwMle with the subsidiary lines, I may 
mention that it capitalized this year more than $7,000,- 
000 of the surplus earnings of the Lake . Shore besides 
the 12 per cent that the Lake Shore regularly earned 
on its stock. 

I give one other sweet sample. It is the year 1907 
in which the New York Central put $2,800,000 of its 
surplus earnings into a "special improvement fund", 
charged off $1,308,260 more as operating expenses, 
bought 5,748 shares of Boston & Albany stock,^paid 6 
per cent dividends on its own stock, milked all of the 
connecting, subsidiary, trolley and other lines into 
which it had converted its surplus earnings, and con- 
vinced Charles Evans Hughes, then governor of New 
York, afterward s^ Justice of the Supreme Court of the 
United States and later Secretary of State; that it 
could not afford to carry passengers at two cents a 
mile. The legislature had passed an act reducing fares 
to the two-cent basis, and the governor vetoed it. 

In 1908, the year following the conversion of Gov- 


emor Hughes to the three-cent theory, there was taken 
from the railroads owned or controlled by the New 
York Central, $5,331,384 of surplus earnings and con- 
verted into "special improvement funds*', while $12,- 
595,440 of new equipment and new construction was 
charged off as "expenses". In that year alone, almost 
$18,000,000 of surplus earnings were concealed. This 
was more than one-half of the total passenger receipts 
for that year. How monstrous is the impudence of a 
corporation that demands higher rates and lower 
wages when half of its passenger receipts constitute 
surplus earnings it must juggle to conceal! 

In addition, the New York Central held $153,700,000 
of the stocks of other railroads, purchased out of sur- 
plus earnings. On these its income in 1907 was $10,- 

It was following a policy to which little attention 
has ever been paid, although it is a most significant 
development. It was investing in the stocks of other 
railroads the surpluses above "a just and reasonable 
profit", — ^the surpluses that should have been returned 
to the public to which they rightfully belonged. 

This meant that the ownership of all the railroads 
was gradually contracting into the hands of the great 
Central Financial Interests, by which these Interests 
were made more powerful than ever. 

The outstanding stock of this railroad in 1907, the 
year when the two-cent fare bill was vetoed, was $178,- 
632,000. Stock, not bonds. There was besides a huge 
capitalization in bonds. 

Of the capital stock alone, this $178,632,000, by the 
lowest possible calculation, $64,892,545 was water or 
fictitious, representing no investment, but only gifts 


or melons or graft or the reinvestment of surplus 
earnings that belonged to the public, ^s follows : 
Water in the original stocks, not bonds — 

Old New York Central $13,894,560 

Old Hudson River 6,480,985 

Consolidation, 1869 44,428,000 


Actual capitalization (most liberal estimate) , $113,- 

The net earnings in- 1907 were $22,565,725.67, or 
twenty per cent on the utmost sum that can be re- 
garded as actual capitalization. 

There was also in the bonds (with other water) 
$45,289,200 of water from the Lake Shore deal, and 
$2,522,145 from the Michigan Central deal, $47,811,- 
S45 in all. Besides which $63,200,000 of surplus earn- 
ings had been capitalized. Altogether the water in 
bonds and capital stock and the capitalized earnings 
amounted to $175,814,990. 

The only plea in defense of this is that some of the 
water has since solidified into real value by the in- 
K crease in the value of the property. 

This is false argument. The increase in the value 
of the property came through increase in the popula- 
tion. It could not possibly belong to the stockholders. 

Yet by the company and later by the Interstate 
Commerce Commission it was made a basis for in- 
creased rates. Nothing could have been more prepos- 
terous and nothing more unjust. 

I offer as a sample of the practices that have been 
habitual with this company, the record of a few years 


in the matter of adding unjustly the surplus earnings 
to the capitalization: 

1890 Surplus earnings transformed into debenture 

bonds 110,000,000 

1900-1907 Concealed as ''Special improvement 

funds" 16,600,000 

1902-1907 Concealed by charging as operating ex- 
penses 20,600,000 

1898-1905 Concealed as "extraordinary expenses".. 7,400,000 

1903 Concealed as additions, improvements, etc 3,200,000 

1887-1888 Concealed as "Enlarging terminals" 5,400,000 

Total $63,200,000 

The Congress of the United States, with childlike 
innocence, accepted in the Esch-Cummins act the 
notion that railroad capitalization is what it pretends 
to be and all of it however made up is sacred and en- 
titled to profits if the treasury of the United States 
must be raided to get them. The infantile minds of 
Congressmen should be directed to a study of the rec- 
ord of some years of the financiering of this remark- 
able company. I will give a few more samples. 

1906. A stock issue melon of $11,900,000 — added 
to the fortunes of the Insiders and to the burden the 
public must bear, 

i!he capital stock was now $178,182,700 on which 6 
per cent dividends were being paid, equal to at least 
35 per cent on the actual investment. The funded debt 
was $230,414,845, which included the bonds issued 
when the Insiders passed their Lake Shore & Michigan 
Southern stock from safe to safe. On all of which the 
road's operation must yield the interest charges. 

1909. Played the Leasing Game with the Geneva, 
Coming & Southern, a subsidiary railroad it had long 

¥HE new YOftK CENTfiAL LiNEd ^ 41 

controlled. The details of these interesting "leases" 
are to be revealed later. I may say now that the gen- 
eral principle is for a party of gentlemen to lease a 
piece of track from themselves as the subsidiary to 
themselves as the main company, to make the rental 
excessive and then to charge the amount to operating 
expenses where it figures as a reason for increased 
rates and decreased wages. 

The same year, 1909, the New York Central & Hud- 
son River increased its capital stock from $178,632,200 
to $223,390,000, being an increase of $44,658,800 in 
one lump'that yielded a melon of $13,397,640. Lus- 
cious melons! 

On this gigantic loot the beautiful Public Service 
Commission of the State put its seal of approval. It 
was great work Governor Hughes did for the railroads 
when he devised that Public Service Commission. The 
people were becoming restless and dissatisfied under 
the load they were carrying; they were insistently de- 
manding relief. Well, then give them something to 
keep them still ; give them a Public Service Commission 
to apply lovely regulation to the evils they complain 
of. Do not end the evils. Just regulate them. With 
these results. 

This year the Lake Shore & Michigan Southern was 
milked to the extent of 12 per cent on its stock for the 
Jbenefit of the Central, which owned 91 per cent of the 
Lake Shore stock. 

1910. This year the Central owned $8,866,507 of 
the $14,777,264 capitalization of one great trolley com- 
bination and $4,500,000 of the $7,500,000 capitaliza- 
tion of another and had much of the trolley business 
by the throat. 


1911. It is plain this year that a substantial part 
of the 6 per cent dividend paid on the New York Cen- 
tral stock was never paid from the operations of that 
road, which was being taxed to the limit. So tremen- 
dous had* been the process of over-capitalization for 
the benefit of the Insiders that for the time being even 
the great earning power of the property had been ex- 
ceeded and all the tribute extorted from the public was 
not enough to meet the interest demands created by 
this fictitious capitalization. 

1911 and 1912. Indications of a new freshet, being 
another "consolidation" of the Central, the Lake Shore,' 
the Michigan Central, the Rome, Watertown & Ogdens- 
burg, the Harlem and the rest of the roads already 
owned, the issuing of a huge blanket mortgage on all 
of these properties and the hoisting of their total cap- 
italization to a billion dollars or thereabouts. All *of 
which would mean more fortunes for the Insiders and 
more tribute exacted from usy exacted through in- 
creased rates if the Interstate Commerce Commission 
could be bunked' or through inadequate maintenance 
if it could not. v 

1914. The consummation of this vast design took 
place exactly as outlined. The Lake Shore now disap- 
peared. The name of the Michigan Central must be 
retained for fear of the Sherman Anti-Trust law, but 
in reality that road was also absorbed, these accretions 
being the cause, as they always are, for more capital 
that represents no investment in the enterprise, but 
on which interest and dividend nevertheless must be 
had from rates — ^passenger and freight — or by lower- 
ing wages. 

You would think that a pickled clam could see that 


the more capitalization the higher rates must be to 
support it, but this simple fact seems never to have 
dawned much at Washington. Nor yet the other fact, 
just as certain, that there is nobody to pay these in- 
creased rates except the general public, through 
increased living charges, or the men that operate the 
roads, through decreased wages. 

Still further in the hope of illuminating the Con- 
gressional mind I recite the fact that in six years the 
gentlemen that owned this railroad had added to 
their fortunes the following sweet melons, taken from 
the enterprise: i 


1893 3% on $10,000,000 stock issue $300,000 

1899 37% on 15,000,000 stock issue 5,550,000 

1902 38% on 17,500,000 stock issue. 6,650,000 

1905 50% on 17,500,000 stock issue 8,750,000 

1906 40% on 29,839,000 stock issue 11,935,600 

1909 30% on 44,658,800 stock issue 13,397,640 

Total $45,383,240 

When to this is added the profits that have resulted 
from the leases we have described, from such great 
operations as the Lake Shore deal and the other devi- 
ous performances back to the days of the Syracuse & 
Utica Direct, we can catch a satisfying glimpse of the 
American Railroad as it really is and of the reason for 
our troubles with it. 

All of these items are still in the capitalization, al- 
though not one of them has any right to be there. It 
is upon capitalization thus falsely or wrongfully made 
that profits are now demanded. 

Also, it was upon capitalization thus formed that in 



1920 the Interstate Commerce Commission granted to 
the railroads an increase of 25 per cent in passenger 
and 35 per cent in freight rates. 

When the capital stock of the New York Central & 
Hudson River had reached $90,000,000, Prof. Frank 
Parsons, reviewing its development step by step, said 
that if from the beginning of the enterprise one man 
had held all the stock it was likely that he would not 
have paid for it more than $6,000,000. 

All the rest represented fictitious . issues, gifts, or- 
capital made out of surplus earnings that never be- 
longed to the company, but always to the public. 

Bearing in mind this finding and the substance of 
the astonishing history we have just recounted we may 
next contemplate the capitalization of this company on 
December 31, 1920. 

Capital stock, $249,597,355; bonds, $748,354,477. 
The interest on the bonds was $30,736,911, the divi- 
dends paid amounted to $12,479,616. 

If in this instance the ancient principle of the high- 
way had never been abandoned, if the capitalization 
had been limited to money actually invested in the en- 
terprise, if all surplus earnings above a just and rea- 
sonable return upon that investment had been restored 
to the public in reduced rates we could ride over it now 
for less than a cent a mile. 

The difference between that fare and the fare we 
actually pay is represented in the great fortunes that 
have been made from this public property. 

In what way have these fortunes benefited us ? 

f )lfi MfiW YOftK CENTRAL LINEd 45 

B. The Lake Shore & Michigan Southern. 

Take almost any of your so-called great railroads; 
take the firmest and best of them ; and you will find the 
foundation walls honey-combed with holes like these. 
Take the history of one long esteemed and highly re- 
puted as a good old reliable dividend dredge, the Lake 
Shore & Michigan Southern, and see. n 

1. Previous to 1867 there were between Erie and 
Buffalo, a distance of 88 miles, two links of railroad,, 
the Buffalo & Erie and the Erie & North East. In 1867 
these two were consolidated as the Buffalo & Erie. 
Just before consolidation their combined capital was 
$2,800,000. Just after consolidation their combined 
capital was $5,000,000. Two million two hundred 
thousand dollars had been added to it after the manner 
of the Syracuse & Utica Direct — ^with the job press and 
the ready pen, not a cent being paid in. 

Two years later this consolidation was merged again 
into another, and once more the press and the pen did 
stheir noblest work and the $2,800,000 of original cap- 
ital was lifted to $10,000,000, with no more money 
actually invested. 

Here was $8,200,000 of capital created out of noth- 
ing and leaving an annual charge upon the operating 
income of the road. 

According to one way of figuring it, this charge has 
never been less than $328,000 a year ; according to an- 
other it has sometimes been more than $1,000,000 a 
year; but every year it has been something and the 
revenue of the road has been stretched and the ex- 
penditures curtailed to meet it. 

Either way, in the end we pay it. 


So far it has cost us not less than $26,000,000. 

2. The next section to the West, Erie to Cleveland, 
96 miles, was in 1867 possessed by the Painesville & 
Ashtabula Railroad, which in six years had divided 
among its stockholders 120 per cent of the face gt their 
holdings in stock, 33 per cent in bonds and 70 per cent 
in cash — ^all melons. The 120 per cent in stock and 
the 33 per cent in bonds were pure water added to the 
capitalization of the property and creating an annual 
charge upon the operating income of the road. The 
total capitalization thus imposing dividend and inter- 
est charges on the property was now $12,000,000 : the 
property had cost less than $5,000,000. 

On the difference there has since been extracted 
from the road's operation an annual interest charge 
varying from $280,000 to more than $800,000. We 
have paid it. 

3. The next link was the Cleveland & Toledo, 113 
miles long. In 1866 it paid a scrip dividend of 25 per 
cent on its $5,000,000 capital, thereby watering the 
stock to $6,250,000. 

The next year this road was consolidated with the 
Painesville & Ashtabula on the basis of $10,000,000 
capitalization, the pen and the job printer having add- 
ed $3,750,000 over night. 

Here was $5,000,000 of fictitious capitalization 
landed upon the operating revenue of the road. Some 
gentlemen on the Inside after the manner of the wiz- 
ards of Syracuse easily made $5,000,000 for them- 
selves : but the road's revenue must be stretched yearly 
and its expenses curtailed to meet the Interest charges 
thereon, which on one basis of estimate have never 
been less than $200,000 a year and on another have 


sometimes approximated $600,000 — every year since. 

The roads between Buffalo ^nd Cleveland had now 
been combined with a capital of $22,000,000. They 
had cost less than $10,000,000. Water so far $12,- 
000,000; representing fortunes for the Gentlemen on 
the Inside and interest charges- landed upon the road's 
operating revenues. 

4. In 1869 all the connecting links between Buffalo 
and Chicago were welded into the Lake Shore & Michi- 
gan Southern Railroad with a total capitalization 
(stocks and bonds) of $57,000,000. Pens and job 
presses had again been busy ; the already watered cap- 
italization of each link was still further watered to 


form the consolidation. 

This total so largely fictitious was floated to $62,- 
000,000 in 1871 and to $73,000,000 a little later. 

If the rate of water to substance that we know to 
have existed in most of the component links was true 
in the others more than one-half of the capitalization 
at $62,000,000 and nearly two-thirds of the capitaliza- 
tion at $73,000,000 was fictitious. 

On this huge mass of fictitious^ capitalization, 
amounting to at least $40,000,000 interest charges 
have been paid since and are being paid now from the 
operating revenues of the road — ^which we furnish. 

The amount so gouged from the public on this item, 
which includes all tl^e other gouges I have enumerated, 
has not been less than $1,600,000 a year and in some 
years it has been nearer to $5,000,000. 

So far these particular operations with the pen and 
the job press have cost us at least $120,000,000. 

About the time the Lake Shore & Michigan South- 
em was put together from these fragments, Cornelius 


Vanderbilt, whose peculiar genius we have just been 
celebrating, was investing in its stock great sums of 
money that he, too, had made with a pen and printing 
press. Presently with such purchases he secured a 
majority, controlled the property and installed his son- 
in-law as its president. 

From this time on the histories of the two properties 
merged, as we have found, until the last traces of the 
old Lake Shore vanished. We may profitably review 
the last few years of their separate existence and ob- 
serve what the Lake Shore meant to the New York 

For out of the huger earnings of the Lake Shore 
were drawn the revenues that supported the stagger- 
ing capitalization of the Central. 

In other words, the amalgamation of the two prop- 
erties was but another device to conceal actual profits. 

They overcapitalized the Central and sold- in the 
market for their profit the extravagant overissues of 
its securities. 

Then they fooled the public by exhibiting apparent 
profits of only 5 or 6 per cent and demanding on that 
showing an increase of rates or a decrease of wages, 
or both. 

The manner of this was simple, although never 
suspected by the country. 

Because the New York Central owned all the stock 
of the Lake Shore, the 18 per cent dividends paid by 
the Lake Shore attracted no public attention and in 
fact were not publicly known. But the Insiders did 
not own all the stock of the New York Central, and 
the dividends paid by the road were of public record 
and discussed in the public prints. By the time the 18 
per cent dividends of the Lake Shore had been divided 



among the many channels of New York Central over- 
capitalization they were made to look much less. This 
was the secret of, and reason for, the whole transac- 

Such are the relations between actual and fictitious 

But it is upon fictitious and not upon actual invest- 
ment that the railroads have succeeded in establishing 
their rates. 

Observe then these interesting tables : 


Lake Shore New 

& Michigan York 

Year Southern • Central 

1901 $63,993 $113,209 

1902 62,097 110,689 

1903 67,304 111,642 

1904 67,419 118,167 

1905 65,488 108,442 

1906. 80,046 119,805 

1907 83,323 123,499 

1908 87,814 128,954 

1909 81,160 129,466 

1910 98,496 139,236 


Lake Shore New 

& Michigan York 

Year Southern Central 

1901 7% 5% 

1902 7 5 

1903 ^r. 7% 5 

1904 8 5 

1905 8 5 

1906 10 5% 

1907 14 6 

1908 12 6 

1909 ^ ....... 12 5 

1910 ,, 18 6 


And hereafter to the final consolidation in 1914, divi- 
dends of 18 per cent paid by the Lake Shore became 
dividends of 5 per cent when diluted through the over- 
capitalization of the Central. 

These great facts now stand forth, clear, indisputa- 
ble, loaded with significance : 

1. In the nature of things the New York Central 
is one of the greatest profit-earning railroad enter- 
prises in the world. 

2. It has been sp grafted upon for melons, so 
drained and depleted by tricks and devices and income 
charges that are so many pumps to draw off its reve- 
nues, that even its enormous earnings are now insuf- 
ficient to meet these drains. 

3. Therefore the Lake Shore, though loaded with 
so many other burdens from the days of the Erie & 
North East to this moment, must be worked and over- 
worked and strained in new ways to produce 18 per 
cent dividends to make good the deficit caused by these 
abnormal drafts upon the New York Central. 

For these conclusions we have not only the evidence 
of the figures here printed ; we have the high warrant 
of the Interstate Commerce Commission in one of its 
most famous findings. 

"The net operating income of this company [the 
New York Central] during the fiscal year 1910 was 
$23,000,000 * ♦ * and so computed there would 
remain $7,000,000 for dividends and surplus, to which 
should be added about $2,000,000 from securities 
owned other than the above stocks, making a total of 
$9,000,000. The present capital stock of the New York 
Central outstanding, according to its report to this 
Commission, is $223,000,000, A dividend of 5 per wnt 


on this amount would exceed $11,000,000 and a divi- 
dend of 6 per cent $13,000,000, from all of which it is 
evident that if the New York Central was confined to 
tKe income from the operation of its system east of 
Buafflo it could not maintain the payment of dividends 
at a rate of even 5 per cent." 

In the next five years, and notwithstanding the In- 
terstate Commerce Commission's rule about paying for 
maintenance from earnings, this road issued millions 
upon millions of equipment trust notes to replenish its 
rolling stock and thereby continued in effect the old 
maneuver of capitalizing spikes and drawheads. 

For all of which we pay, and shall pay many times. 

In New Zealand the rule about the railroads is 3 per 
cent profit on the money actually invested and all the 
rest returned to the public in the shape of reduced 

Contemplate the vast quantities of water in the Lake 
Shore and the New York Central, and then ask your- 
self this question : 

Suppose the rule followed in New Zealand, which is 
the old principle of the highway, had been the rule in 
the United States, where should we be now in the mat- 
ter of freight rates, for instance? 




A. Foundations of Its Cafpital. 

Long before the Civil War, before the discovery of 
gold, before California was a possession of the United 
States, thoughtful men had dreamed of a transconti- 
nental railroad line. 

It was a fascinating dteam. The ways to the Pacific 
Coast then were long and full of chances. By land 
they meant months of slow teaming among hostile In- 
dians; by sea, a frightful voyage around Cape Horn 
or a doubtful journey across the Isthmus of Panama. 

When California began to fill with Americans and 
to reveal something of its stores of wealth, a railroad 
became an urgent necessity. Among the men that 
speculated about it and how it would come was Theo- 
dore D. Judah, an accomplished engineer and respected 
citizen of Sacramento, about the year 1860. 

The sum of the difficulty was to get past the high 
wall of the Sierra Nevada Mountains. Emigrants 
threaded that barrier with wagon trails but none of 
these was supposed to be possible for a railroad line. 
The huge rampart of rock was so formidable that most 
of the engineers gave it up and believed that when 
California secured a railroad to the east it would be 
by a long detour, at least four hundred miles to the 
south, to avoid the high mountains. 

In the old mining camp called Dutch Flat, high up 


on the slope of the Sierra Nevadas, lived Daniel W, 
Strong, a mining pioneer and prospector. He had 
studied the problem a,bout the railroad and the moun- 
tains and had come to the conclusion that it was far 
from hopeless. 

Being in Sacramento, chance threw him into contact 
with Engineer Judah, in whom he found a more than 
willing listener. On the strength of what Strong told 
him, Judah began to make excursions on foot among 
the Sierras. He must have been of rare diligence and 
persistence, for he had gone twenty times alone from 
Sacramento to wander through the Sierras before he 
found what he was looking for. It was a pass among 
the mountains by way of Dutch Flat and the Truckee 
river, and he was sure a railroad could be built 
through it. 

He had a friend in Sacramento, one James Bailey, 
a jeweler, to whom he told his discovery. Bailey 
thought a company could be organized right there xin 
Sacramento to build that road. He and Judah invited 
the merchants of the city to come one night to the St. 
Charles Hotel and hear Judah describe his project. 
The merchants came but were not much impressed. 
Bailey talked of it to both members of the firm of 
Huntington & Hopkins, hardware dealers; to Charles 
Crocker, who kept a dry goods shop ; to Leland Stan- 
ford, a young lawyer; to the Lambard brothers, to 
Samuel Brannan, and John R. Robinson, Sacramento 
business men. Out of these efforts and Engineer 
Judah's faith was organized on June 28, 1861, the Cen- 
tral Pacific Railroad Company, with a capital stock of 
$8,500,000, of which 10 per cent was paid or alleged to 
be paid in. It is interesting to note that Daniel W. 


strong, the old pioneer, in whose mind the project first 
took shape, was one of the stockholders. 

How much actual money was thus actually invested 
in the enterprise was not made known at that time, but 
came afterward to be a subject of much concern to 
some of the courts, which tried hard to find out the 
facts. Besides the disttovery that some of these men 
seemed willing at different times to make wholly differ- 
ent assertions about the same thing, only one solid fact 
was unearthed by these investigations. It was that 
the original incorporators, four of whom soon ap- 
peared as sole owners of the enterprise, risked little 
of their own means in it. 

These men, Messrs. Huntington, Hopkins, Stanford 
and Crocker, got up a petition not long afterward to 
Congress asking for a subsidy to aid in the building of 
their line and in this they made a sworn deposition 
that their wealth in 1862 was as follows: Leland 
Stanford and his brother, $39,950; Charles Crocker, 
$25,000 ; Mark Hopkins, $9,700 ; CoUis P. Huntington, 
$7,222; the firm of Huntington & Hopkins, $32,950; 
total, $108,987. This, they swore, was all the wealth 
they had in the world. As their allotment of stock 
would have called, on a 10 per cent basis, for cash pay- 
ments of more than $200,000 it is evident that they 
did not pay their share unless they borrowed> much 
money or unless they had much more wealth than they 
swore they had. Some years later, Mr. Huntington, 
testifying under oath, before a Committee of Congress, 
said that in 1862 the total wealth of the four was more 
than a million dollars, having apparently forgotten all 
about the petition that made their total possessions 
$108,987, although that also had been sworn to. 


These four soon became, first, the dominating and 
then the only figures in the story. In one way or an- 
other they rid themselves of all the others that had 
taken stock in the Central Pacific. In four strange 
suits at law that came to be, filed years afterward in 
San Francisco very damaging allegations were made 
about the manner in which the other stockholders had 
been thrown out of the boat. We shall have occasion 
to refer again to these suits. The present point is that 
in them four men, in a position to know all the facts, 
swore that Messrs. Huntington, Hopkins, Stanford and 
Crocker paid never a cent for their stock, invested 
nothing in the enterprise and diverted to their own 
uses money and property that belonged to the com- 

The only money actually invested in the Central Pa- 
cific, according to these allegations, was paid in by the 
other stoclcholders and by counties that sought to help 
the road by subsidizing it. 

There was, as a matter of fact, no reason why much 
money should be required of the stockholders. The real 
nature of the enterprise, as we can see now, did not 
demand much money. For the purpose was not to 
build and equip a railroad with the company's capital, 
but to induce the United States government to do the 
building and equipping and then to deliver the road, 
built and equipped, to these four gentlemen. 

The originator of this happy thought has been sup- 
posed to be Mr. Huntington, but as other gentlemen 
elsewhere in the country were possessed of it at about 
the same time, we cannot be sure that he invented it. 
For many years, as we have seen, the hope of having 
a railroad to the Pacific Coast had laid strong hold 


upon the imagination of the country. Congress appro- 
priated money for preliminary surveys; many legis- 
latures had petitioned and resolved about it. To the 
general purpose the mind of the nation was all 
friendly. If men that had railroad schemes did not try 
to take advan,tage of this mood they would have for- 
gotten their cunning. 

Nevertheless men without such schemes and only 
desirous for the country's good insisted that the gov- 
ernment should build and operate the road. They 
pointed out the immense dangers and expenses that lay 
in surrendering to private hands the control of this 
most important of all the highways, and but for one 
circumstance it is possible that these prophets might 
have been heard. 

The CiVil War came on. It sharply illustrated the 
need of a transcontinental railroad line because the 
main traveled stage route to California lay through 
regions that had revolted with the Southern States, and 
it had another effect useful to men with private pro- 
jects for such a line. It diverted the attention of the 
country so that legislation that might ordinarily be 
difficult could be slipped through without too much 

What work therefore lay first to hand before the 
astute gentlemen of Sacramento was not with pick and 
shovel, "nor anything in that line, but in the stately 
halls of Congress. To the stately halls Mr. Huntington 
in person addressed himself. At first he took with him 
there Mr. Judah, the engineer, discoverer of the route 
over the mountains and actual founder of the whole 
enterprise, so far as it was physical and not a gamble. 
The assistance of the engineer to explain the Central 

The dOUTMERN PAClftC SYdf&M 5? 

Pacific route and how easily it could be used was nat^ 
ural enough, but Mr. Judah seems to have been of 
little use in Washington; information as to the Central 
Pacific route did not seem to be in great demand. Mr. 
Judah died rather more than a year later and left the 
cause of his dissatisfaction unexplained^ but it appears 
that he was not happy over some of the development-c. 

Supposing him to be of ordinary scruples, there was 
reason enough. What line of arguments seemed to 
impress Congress and how the Central Pacific scheme 
came to win its approval we can surmise when we 
come to study certain documents in which Mr. Hunt- 
ington described to an intimate' friend and associate 
the exact nature of his employments among the na- 
tion's statesmen. It is enough here to say that these 
employments were crowned with great and even as- 
tounding success. It was the time when Oakes Ames 
and his Credit Mobilier schemers were putting over a 
similar project in behalf of the Union Pacific organi- 
zation. Mr. Huntington joined forces with this aggre- 
gation of talent and the whole thing went through 
swimmingly together — ^Union Pacific, Central Pacific 
and all. Afterward, when it was too late, the Credit 
Mobilier and Union Pacific part of these operations 
came to be a stupendous national scandal in which 
many reputations were blackened and many careers 
wrecked, but the share of the Central Pacific in the 
legislation that made part of the scandal was generally 

Yet it ought not to have been overlooked, for it was 
one of the most extraordinary achievelnents in the 
whole history of lobbying. As I have pointed out, 
there was nothing wonderful at that time about get- 


ting Congressional aid to a Pacific railroad scheme. 
What was wonderful then and is wonderful now is that 
discarding other, better and less costly plans, Congress 
should have made with these men a contract that out 
of hand bestowed upon them such vast fortunes with- 
out exacting a tangible return. 

The bill passed both house and was signed July 1, 
1862. In substance and effect it engaged the govern- 
ment to build the road v/ith public funds and make of 
it a gift to the Fortunate Four of Sacramento, at the 
same time presenting them with many millions of dol- 
lars, collected at public expense. 

The wording was, of course, somewhat different. 
First, there was given to the Central Pacific Railroad 
Company every alternate section of public land desig- 
nated by the odd numbers to the amount of five alter- 
nate sections for each mile of the railroad, and on each 
side of it. You will not understand this unless you are 
familiar with the mystery of railroad grants, so I will 
translate it/for you. A section is 640 acres. The bill 
set apart a strip of land twenty miles wide, ten miles 
on each side of the track for the whole distance, and 
then gave to the company half of the land in that twen- 
ty-mile strip, or 6,400 acres of the people's land for 
every mile of railroad. This land was worth, at the 
lowest estimate, $16,000,000. 

The bill then provided that as soon as the company 
should complete forty miles of track the government 
should issue to it bonds of the United States of $1,000 
each, bearing 6 per cent interest, for each mile of rail- 
road constructed, as follows : 

For every mile in valley or level land, $16,000 in 


For every mile in the foothills, $32,000 in bonds. 

For every mile in the mountains, $48,000 in bonds. 

On the route planned by the Central Pacific, the 
value of this subsidy was $27,500,000. Total help from 
the government so far $43,500,000. 

Meantime, Leland Stanford, President of the Central 
Pacific, had been elected Governor of California, and 
under his care the legislature passed many bills for the 
company's benefit, most of them allowing the towns 


and counties to contribute to the company's coffer, 
which they promptly did. San Francisco gave $400,- 
000; Placer County, $250,000; Sacramento County, 
$300,000 — in subscriptions to the stock — ^and the 
State of California gave a liberal donation. 

With all these and still other resources in hand, the 
company saw that it wa>3 in a condition to begin actual 
operations, and on January 8, 1863, with much cere- 
mony, ground for the new line was broken at Sacra- 
mento, the legislature being present in a body and Gov- 
ernor Stanford digging the first shovelful of earth. 
Contracts for the first eighteen miles were let to nine 
different persons. Beyond that and so far as the 138th 
mile, Mr. Crocker (operating as Charles Crocker & 
Company) was the sole contractor. Thirty-one miles 
of track had been laid up to September, 1864. 

Although the grants to the company under the Act 
of July 1, 1862, had been so amazingly liberal, Mr. 
Huntington was not satisfied with them, and believed 
that still more could be extracted from a government 
so generous with the peoples' money. Partly in con- 
junction with the interests back of the Union Pacific, 
he planned a new raid on Congress. The Union Pacific 
had been authorized to build west from th^ Misi^Quri 


River to meet the Central Pacific, and had received 
similar grants. Mr. Huntington particularly wished 
to have the act of 1862 enlarged about the bond gift./ 
As it stood it read thus : 

"The issue of said bonds and delivery to the com- 
pany shall ipso facto constitute a first mortgage on the 
whole line of the railroad and telegraph, together with 
the rolling stock, fixtures, and property of every kind 
and description, and in consideration of which said 
bonds may be issued'* 

Mr. Huntington maneuvered so well and, in his own 
apt phrase, "explained things" so successfully to Con- 
gressmen that he got a new act passed in July, 1864, 
drawn apparently in every respect to his will. It 
changed the first mortgage of the government bonds in- 
to a second mortgage, and allowed the company to issue 
its own first mortgage bonds to the same amount as the 
government bonds. It also changed the land grant. 
The strip of donated land on each side of the track was 
now made forty miles wide instead of twenty, and the 
number of acres bestowed upon the company increased 
from 6,400 to 12,800 for every mile constructed. In 
the old act mineral land in the donated tracts had been 
exempted. Mr. Huntington had that changed so that 
mineral lands containing coal and iron were included 
in the gift to the company, the reason being that much 
good coal lay along the route. Bonds of both kinds 
were also allowed to be issued in advance of construc- 

The new law virtually made the government guaran- 
tee the company's first mortgage bonds, and the com- 
pany now began to issue such bonds and to sell them. 


Mr. Huntington went to Boston and sold a great many 
at par and interest ; and some at a premium. 

Mr. Crocker pressed on with the building, Mr. Hiin- 
tington buying the material in New York and shipping 
it around the Horn. 

As fast as the road was built, it was opened and be- 
gan to do business and to make money. 

Government bonds were issued to the company mile 
by mile as the road was built. With these and the pro- 
ceeds of the company's bonds Mr. Crocker carried on 
the construction. It appears that for the work be- 
tween the eighteenth mile, where he took charge, and 
the lS8th mile, where he left off, he received in securi- 
ties a little more than $10,000,000. 

On the face of it this seems mysterious. Ten million 
dollars for 120 miles is at the rate of $83,300 a mile. 
Yet it was obvious at the time and afterward proved 
that the construction had cost no such sum. As we 
shall see later the cost of railroad construction in this 
country has often been exaggerated when exaggeration 
has been to the advantage of railroad promoters, but 
in those days nobody really asserted a construction 
cost like this. ^ 

Moreover, the arrangement with the builder was 
strangely loose. He did the work, presented his bills, 
whatever they were, and received in payment mile by 
mile the bonds and stocks that the company had is- 
sued or had received from the government. His bills 
specified the amount of work done, so much dirt exca- 
vated, so much rock, so much for culverts and the like, 
and these were paid accordingly and without question. 
It is not thus that we are accustomed to see great con- 
struction work carried on. 


From the 138th mile on, the work was done by 
another contractor. 

Behind this simple little every day fact lies one of 
the strangest chapters of this whole strange story. We 
are to come back to it later and tell it in full. Then we 
shall all admit that as a narrative it equals a novel, and 
in the way of direct personal interest to every one of 
us far surpasses anjrthing we shall ever find in fiction. 

Ordinarily, what do we care what contractor built 
any part of any railroad Firm, individual, company — 
what is it to us ? And this was sixty years ago. What 
do we care? 

We care this much, or have reason to care, that 
every day of our lives the fact that lies back of the 
change in contractors on the Central Pacific comes to 
our tables and collects money. Year in and year out it 
gathers tribute, millions and millions of tribute. The 
expenses of every household in the country are affected 
by it. Because of it we pay more for things we eat 
and wear and shelter ourselves with. Every year we 
pay more. By means of this extra tribute and this 
alone we have already paid more out of our household 
expenses than the whole Central Pacific Railroad cost. 
We shall continue to pay it over and over as long as the 
present transportation methods exist in the United 

For much more was done than merely to change the 
name of the contractor when Mr. Crocker withdrew 
at the 138th mile. There was at the same time erected 
a magical pump for gathering the nation's wealth into 
the hands of a few, a marvelous Millionaire Mill that 
made its owners rich at public expense and while they 


The Contract and Finance Company was the name 
of Mr. Crocker's successor in the building of the Cen- 
tral Pacific. It was a joint stock concern, regularly 
chartered to build railroads and do other things. 

There were four stockholders, and no more — CoUis 
P. Huntington, Mark Hopkins, Leland Stanford, and 
Charles Crocker. Mr. Crocker was manager and ap- 
peared in actual charge of the actual work. If a man 
had known nothing of the inside of the story he would 
never have suspected there had been a change. 

Yet there had been, of the most momentous nature. 
Because now the bonds issued by the United States 
to aid the work and the bonds and stocks issued by the 
Central Pacific were turned over mile by mile to the 
Contract and Finance Company, and if anything was 
left after labor and expenses had been paid it naturally 
remained with that company instead of going back to 
the government or being added to the general assets of 
the Central Pacific. 

What might become of the assets of the Central Pa- 
cific would be a matter of concern to the government 
and the public because the Central Pacific would soon 
be a debtor in a large amount to the government. What 
should become of the assets of the Contract and Fi- 
nance Company was nobody's business except that of 
the stockholders. And the stockholders — ^who were 

Messrs. Huntington, Hopkins, Stanford and Crocker. 

If any body is disposed now to think that this ar- 
rangement was accidental and what came of it was not 
deliberately designed, such a charitable soul should 
turn next to the sinister performances of the Central 


Pacific in its dealings with the United States govern- 

Mr. Huntington's law allowed the company to charge 
the government $16,000 a mile (to be paid in govern- 
ment bonds) for all the line it should build in level or 
valley country, $32,000 a mile for line built in foot- 
hill country and $48,000 a mile for line built in the 

The company charged the government at the moun- 
tain rate, $48,000 a mile, for building on thirty miles 
of level or nearly level land near Sacramento, and at 
foothill rate, or $32,000 a mile, for building a hundred 
miles across the valley and desert east of the Sierras, 
a region as level as a floor. 

It was this achievement that gave rise in California 
to a bitter jest not even yet forgotten there. Men said 
that the Central Pacific was the strongest corporation 
in the world, for it had moved the whole range of the 
Sierra Nevada mountains thirty miles. 

Against this trickery Mr. Judah alone had protested. 
Not long after, his interest in the Central Pacific was 
callously sacrificed with that of Bailey the jeweler and 
others among the original supporters of the project. 
Mr. Huntington put to them the bald proposal that 
they should buy or sell. As they had no money to buy 
with, the alternative was like a pistol at their heads. 
Still they hesitated. To encourage decision, Mr. Hun- 
tington rode one day along the entire line and stopped 
all work, a privilege he had retained under the. con- 
tract. Menaced with the failure of the enterprise, the 
outsiders were driven to sell, and Huntington, Hop- 
kins, Stanford and Crocker secured the ownership. 

They kept it for sixteen years in which it produced 


for them, without effort or investment on their part, 
four of the largest fortunes in the world. When for a 
time -they parted with it, that act also produced other 
fortunes and when they took it back, still other for- 
tunes. Automatically, coming and going, it produced 

But this ik to run a little ahead of our story. Soon 
after the forced exit in this manner of the other stock- 
holders, the Central Pacific Railroad Company in- 
creased its capital stock to $20,000,000, and soon after 
that to $100,000,000 of which $62,000,000 was issued 
(but not paid for) and the rest reserved in the com- 
pany's treasury. 

Issued but not paid for? How could that possibly 
be ? Did it pass into the hands of individual owners 
who took it and possessed it and had it for theirs and 
still never had to pay a cent for it? 

Exactly so. First the $62,000,000 and eventually the 
remaining $28,000,000 and many other valuable things, 
all going the same way into the possession of these 
four gentlemen of Sacramento without the payment of 
a cent therefor. How was this marvel accomplished ? 

It is here that for the first time we cross the secret 
trail of the Contract and Finance Company and have a 
chance to see why Mr. Crocker gave up the building 
contract at the 138th mile. The Contract and Finance 
Company was the means and agency by which this 
stock was thus effectively transferred without money 
and without price. ^ 

Thus transferred, we may observe here, it became, 
of course, part of the capitalization of the Central Pa- 
cific Railroad. 

On that capitalization rates were based* On it rates 


continue to be based and we continue to pay them to 
this day. 

On it also wages are determined. 

When the Interstate Commerce Commission figures 
now the capitalization of the American railroad system 
on which it estimates railroad revenues and fixes rail- 
road rates, it includes this $100,000,000. 

When the Railroad Labor Board decides that to en- 
able the railroads to earn a reasonable interest on their 
capitalization wages must be reduced, the capitalizar 
tion on which the Board figures includes this $100,- 

When a statesman like Senator^ Cummins prepares 
a bill to guarantee to the railroads a return upon their 
capitalization and pledges the United States treasury 
to make that return good, this $100,000,000 is part of 
the capitalization he makes the basis for his legisla- 

When passenger rates are increased even between 
far-away Chicago and New York from $20 to $32.70 
in order to enable the railroads to earn a fair return 
upon the total capital invested, items similar to this 
$100,000,000 are part of the capital so considered. 

When the railroads protest against the reduction of 
freight rates and show that it will prevent them from 
earning a fair return upon their capitalization, they 
mean upon this item of $100,000,000 and others like it. 

Yet it represents no investment in anything. It is 
not and never was a part of any actual railroad enter- 
prise. It was and is nothing' but a device 'to collect 
tribute from the public and deliver such tribute into 
the hands of the gentlemen lucky enough to have pos- 
session of the device. 


By 1866 the gentlemen of the Central Pacific had 
either in actual existence or in certain prospect tiiese 
items of wealth : 

Stock (issued or to be issued) $ 62,000,000 

Land 30,000,000 

Government bonds 27,500,000 

Their own guaranteed bonds 27,500,000 

Donations, about 2,000,000 

Total $149,000,000 

And their railroad was steadily pushing eastward. 

Only one prospect clouded their felicity. 

The Union Pacific Railroad, backed by a band of 
speculators as greedy but not so fortunate, was now 
(with government money) building its line westward 
from Omaha. For three or four hundred iriiles its way 
led through a country flat as a board, close to water, 
and in sandy soil easily dug. It therefore, progressed 
with great rapidity, sometimes laying as much as ten 
miles of track in a day. 

The act of 1864 had authorized the Central Pacific 
to build eastward to a junction with the Union Pacific, 
wherever that might be. At first the four partners 
had assumed that this junction would be far to the 
eastward, allpwing them goodly mileage and many fat 
bonds, but the swift advance of the Union Pacific be- 
gan to annoy them, and by 1867 they were thoroughly 
alarmed. The Union Pacific was approaching the 
mountains. If it should thread them first, the Central 
Pacific would lose the fattest part of its contract with 
the government; also the best of the joint haul when 
the roads should be united. 



There ensued the maddest chapter in all railroad his- 
tory. The two roads entered into a race, tearing into 
the work before them regardless of any question of 
cost, working day and night with relay gangs. 

In April, 1869, the Central Pacific builders were al- 
most within sight of the enemy's lines. 

Before them was Ogden, the goal of the race, in the 
great valley between the Rocky and Sierra Nevada 
ranges. In the fury of competition both companies 
far overshot the mark. The Union Pacific had its 
graders one hundred miles west of Ogden ; the Central 
Pacific had its advance line forty miles beyond its track 
layers. Only the iron actually put into position count- 
ed in the race. / 

On the last day, ten miles of track were laid ; on April 
28th, they struck the Union Pacific line fifty-three 
miles west of Ogden; and May 10th, they drove the 
golden spike that cemented the two roads. The Union 
Pacific had won by fifty-three miles. Subsequently, 
the Central Pacific bought of the Union Pacific, at a 
high price, the overlapping road and charged this and 
its own^ superfluous building and all the other lunacies 
of the race into the capital on which we now have the 
pleasure of paying interest. But the road was built, 
and the four promoters of Sacramento had a mileage 
sufficient to justify their bond issues. They now sat 
down to figure the cost and to pass it to the public in a 
needless and increasing burden that the public has pa- 
tiently borne ever since. 

The world rang with the exploit; the country re- 
joiced ; California was superbly happy. That May day 
she hailed as her deliverance ; she was now truly of the 


country, bound to it with more than iron cords. The 
new communication, reducing her distance by three- 
fourths, brought her into the house of states ; all would 
now be well with her. So her people said. And yet, 
so tangled and contradictory are the affairs of men, 
there was at the same time laid upon her a heavy and 
bitter curse that to this day she has never been able 
to shake off. 

The rapid building of the Central Pacific through 
the mountains was for the times a great exploit. Nat- 
urally it has since been far surpassed as an achieve- 
ment of engineering and construction. Abating noth- 
ing of admiration for the physical performance, it is 
time now to reflect that it was also a monstrous tri- 
umph of greed, fraud and corruption; that it might 
have been had a fraction of its cost to the public ; and 
that it might very easily have been a blessing instead 
of a blight to that rich country of which it was ecstat- 
ically miscalled the Gateway. 

For the Gate was quickly closed and before it ap- 
peared the grim figure of CoUis Potter Huntington, one 
hand holding the key and the other stretched out tak- 
ing toll. The physical figure of Huntington is no longer 
there, but the Gateway remains closed and before it are 
his successors, still busily taking toll. 

How much — do you think? 

From the day the Gate was erected and closed, down 
to the year 1922, first Mr. Huntington and his asso- 
ciates and then their successors have taken and divided 
more than one billion dollars in unjust tolls, all from 
the people of the United States, who so kindly erected 
the Gate across their own highway. 


With that sum, the people could have built ten rail- 
roads from the Missouri to the Pacific. 

And they need have had no closed Gateway and no 
toll takers fattening upon an enforced and arbitrary 

B. The Contract and Fmanee Company. 

This matter of the capitalization of railroads being 
of such great importance, so that all rates are based 
upon it and all wage scales come back to it, we ought to 
welcome an l)pportunity to see what capitalization 
really is and how it is made. 

We ought to welcome it the more because it means so 
much to us in so many ways. Every time we ride on 
a railroad at least one-half of the price of our ticket is 
a tribute levied on us by excessive capitalization. Every 
time we ship goods by freight or express we pay this 
tribute. Every time we buy anything that has been 
shipped by freight or express we pay it plus the profit 
charge on that tribute added by every person that has 
handled it. 

In 1877 a committee of the United States Senate 
after investigating railroad conditions, found that an 
increase of 5 cents a bushel in the freight charge for 
carrying cereals would mean an increase of $40,000,- 
000 a year in the cost of living of the people. 

If it was $40,000,000 then, it would be at least $120,- 
000,000 now, for the population has nearly doubled and 
what was worth 5 cents then is worth 10 cents now. 

But the freight charges on cereals in the last few 
years have been increased much more than 5 cents a 
|)us}ie|. Hence it is likely that since 1913 the cost of 


living of the American people has been increased by in- 
creasing freight charges on cereals alone $500,000,000 
a year. 

Most of the demand for these increases of freight 
rates have been caused by the necessity of meeting the 
interest charges on this same capitalization, always 
increasing, therefore always demanding more income 
for the railroads. 

What, then, is this hungry fiend, Capitalization? 
Who puts it into our railroad system, and what for? 
What is there about it that is so sacred that the inter- 
ests of the nation must stand aside until it has been fed 
with tribute thus levied and collected? What is this 
strange creature and where does it come from? 

We have now a good chance to discover the answer 
to all these questions — one of the best, in fact. The 
secrecy that ordinarily conceals the financial opera- 
tions of a railroad has for once been broken through. 
The investigations of the Pacific Railroad Commission 
have given us the material for the whole story of the 
Contract and Finance Company, and after we have 
thoughtfully considered that grand narrative none of 
us need have any doubt as to the holy nature of Capi- 
talization nor the reasonableness of putting it ahead 
of everything else in the railroad question. 

We have seen that the four stockholders of the Con- 
tract and Finance Company, Messrs. Huntington, Hop- 
kins, Stanford and Crocker, were also the chief, or you 
might say, the only stockholders in the Central Pacific 
Railroad Company. As directors of the Railroad Com- 
pany they now proceeded to make a contract with 
themselves as directors of the Contract and Finance 


Company, to build the Railroad Company's lines and 
take in pay therefor bonds and stocks. 

The same peculiar arrangefnent we have noted with 
Mr. Crocker was repeated here. The Contract and 
Finance Company presented its bills for the work and 
the Railroad Company paid them — ^with these securi- 
ties ; bonds and stocks, the government's and its own. 

But the Central Pacific happened to have been or- 
ganized under the laws of the State of California, and 
these strictly forbid a railroad company to do two 

To issue bonds in excess of the amount of stock it 
haci issued; to issue stock except for the payment of 
cash or the equivalent of cash. 

Ten per cent of the stock must be paid for when the 
company is organized. The rest may come in install- 
ments — in cash or the equivalent of cash. 

For two reasons this law put the four happy gentle- 
men of Sacramento in an awkward situation : 

1. The control of the company lay in the owner- 
ship of its stock. They wanted to own the stock. They 
did not want to have to pay for it. They wanted to get 
it for nothing. ' 

2. As fast as the road was built the government was 
issuing to them its bonds, chiefly at the fraudulent rate 
of $48,000 a mile. They were then authorized to issue 
the company's own bonds for the same amount. These 
bonds being a first mortgage were worth 105. It was 
good business to issue them. But under the law of 
California they could not be issued until there had been 
stock issued to the same amount. And this stock must 
be paid for in cash or its equivalent. 

If it were put upon the market the happy four would 


lose a part of their Great Good Thing. If they did not 
put it on the market they must pay for it themselves. 

To this they were conscientiously hostile. 

But suppose that for building the railroad the con- 
tractor was willing to take stock as part payment for 
work done. Suppose he gave his receipted bills in ex- 
cliange for this stock. That would meet the require- 
ments of the law in regard to cash or the equivalent 
of cash, would it not? A contractor's receipted bills 
for work done are as good an equivalent of cash as any- 
thing you can think of. First point. 

Then the company, having disposed of so much 
stock, could now proceed under the law to issue an 
equal amount of its own bonds, worth 105. Second 

Suppose next that the contractor getting possession 
of the stock thus, should see fit to make a present of it 
to worthy friends of his. It would be his own ; he could 
do with it as he might see fit. Suppose then that these 
worthy friends should be his three associates in the 
Central Pacific and himself. The stock, which carried 
with it the control of the company, would never be out 
of the possession of these worthy four and all would '^ 
be lovely with these deserving patriots. Third point. 

Then, if we imagine that by some error or miscalcu- 
lation or carelessness tlic actual cost of building the 
road might be less than the amount charged by the con- 
tractor and the difference might represent approxi- 
mately the amount of the stock that he accepted, the 
stock would be issued for cash or the equivalent of 
cash, as the law demanded, and would pass into the 
possession of the worthy four and yet they would never 
be obliged to pay for it. 


Errors in keeping railroad accounts, as the Inter- 
state Commerce Commission knows well, are easily 
made. It seems to be a business peculiarly liable to 
errors. For instance, in the last chapter we found that 
Charles Crocker & Company received $83,000 a mile 
for building 120 miles of the road. Yet the cost of 
construction, as afterward ascertained by the expert 
engineer of the Pacific £ailroad Commission, was only 
$50,317 a mile. 

For this the government was issuing its own bonds, 
mostly at the rate of $48,000 a mile, and the company 
was issuing stock and bonds. 

It is evident that if the building contractor were 
equally careless about his accounts along the whole line 
there would remain in his hands a large amount of the 
securities delivered to him by the Central Pacific to 
pay for the work. 

The directors of the Central Pacific desired to issue 
$62,000,000 worth of stock that they might issue and 
sell a corresponding amotint of \bonds. You can im- 
agine that with equal carelessness in accounting for 
the whole 687 miles of line the entire ftock issue of 
$62,000,000 might be taken up in this way, reach the 
wbrthy four and they never pay a cent for it. Some- 
thing of the kind might easily be possible, because 
years afterward the then secretary of the Contract and 
Finance Company testified under oath that the com- 
pany received $86,000 (in securities) for each mile it 
built, while the expert engineer testified that the actual 
cost was $50,537 a mile. 

Besides which, there was the land grant. In Con- 
gress once Representative Barclay Henley showed that 


the whole Central Pacific Railroad could have been 
constructed out of its land grant alone. 

In the processes we have imagined, however, there 
would be one hitch. 

A firm of contractors could not continue to make 
presents of valuable stock to its friends without arous- 
ing unpleasant remarks. No matter how worthy the 
friends might be^ the repeated gifts of millions of dol- 
lars of stock would make people talk. People are so 
uncharitable and so fond of gpssip. Particularly about 
rich men. 

But with a joint stock company it would be very dif- 
ferent. Suppose a joint stock company at the end of a 
year found itself in possession ot.$10,000,000 or $15,- 
000,000 of surplus securities ; stock, let us say, Central 
Railroad stock, delivered to it for construction work. 
It would not have to make any present to any of 4ts 

It would merely distribute its assets among its stock- 
holders, which is perfectly right and proper; all joint 
stock companies do it — ^when they have any assets to 

Moreover, captious and gossipy people need never 
know about it. The proceedings of a joint stock com- 
pany are secret. 

Of course there would have to be somewhere some 
memoranda or books that would show what was actu- 
ally paid out for the work and what was actually re- 
ceived for it — in securities — ^but these if judiciously 
kept need never attract the attention of a fault-finding 

All this being quite clear, we will now return to our 


narrative, to which I am sure it will be found to have 
added much interest. 

In 1870 there came to California from Virginia a 
young man named John Miller, who found employment 
with the California Pacific Railroad as clerk and ticket 
.agent at the South Vallejo station. He was capable 
and industrious, and capable railroad men were few in 
California. The company that employed him had built 
a line eastward from Oakland and had hopes of some 
day crossing the mountains and becoming transconti- 
nental. A year later when some men in the railroad 
way at Sacramento wanted an efficient accountant, 
thfey learned of Miller, sent fbr him, looked him over, 
and thought he would do ; so he went up to Sacramento 
and entered upon his new job, which was better than 
his old one had been. It was with the Contract and 
Finance Company, of which a kindly old man known as 
Uncle Mark Hopkins was the president. The office was 
Tight over Huntington & Hopkins' hardware store in 
K street, and across the hall were the offices of the 
Central Pacific Railroad, of which Uncle Mark Hopkins 
was treasurer and director. 

Young Mr. Miller's task was to assist the paymaster 
of the Contract and Finance Company, and to keep 
books — ^not the main books of the concern, for these 
were always kept by William E. Brown, the company's 
secretary, but certain other books that he called auxili- 
ary books. 

To build and keep in repair the lines of the Central 
Pacific and of railroads with other names, was the 
business of the Contract and Finance Company, but 
the books that young Mr. Miller kept did not contain 

^ I 



a complete record of these matters; they related only 
to minor phases of the work in hand. 

Young Mr. Miller was observant as well as studious, 
and when, some months after he entered the office, he 
saw that Mr. Brown was employed diligently upon the 
main books of the concern, the nature of this employ- 
ment aroused Mr. Miller's curiosity. He took occasion 
when Mr. Brown was absent to examine the books that 
Mr. Brown kept, and found them to contain matter of 
. much interest. 

In fact, the more he examined them, the more inter- 
ested he became. They were books that recorded the 
building and repairing of railroad lines for the Central 
Pacific — ^what the work actually cost, and what had 
been paid for it — ^and might, therefore, be deemed to 
be among the most juiceless and unattractive volumes 
in the world ; but young Mr. Miller found them remark- 
ably diverting. 

Finally, he became so much interested that, like the 
careful student he was, he made from day to day a 
series of abstracts and memorada of the matter where- 
with he was being entertained, and these he took home, 
perhaps for more deliberate enjoyment in quiet hours. 

He did not let Mr. Brown nor any one else know of 
the literary treasures he had found, but just read and 
made abstracts and copies and put them away. 

In Charles Reade's once popular novel, "Hard Cash'', 
there is the same ^incident. Young Skinner, a clerk 
in Mr. Hardie's bank, becomes greatly interested in the 
way his employer is keeping his books. So when his 
employer is out of the building he makes copies of cer- 
tain real and fabricated balances and takes them home. 
There is a good scene when the employer starts to dis- 


charge the clerk and the clerk flashes these abstracts — 
very dramatic. It suggests to Reade a nasty remark. 
He says that man is pre-eminently a cooking animal. 
He cooks books as well as food. 

Of a sudden, one day in September, 1873, Mr. Brown 
entered the office and hailed young Mr. Miller with 
glad tidings. 

"The Contract and Finance Company has elected you 
to the office of secretary,'' said Mr. Brown. "I have re- 
signed and am going to Europe. And now here is a 
set of new books for you to go to work with." 

Young Mr. Miller was duly gratified. He took pos- 
session of the nice new books and observed that they 
had already been opened in Mr. Brown's handwriting, 
each account starting with a balance apparently car- 
ried over from the old books. 

About noon he went forth, as was his habit, to his 
midday repast, leaving Mr. Brown in the office with the 
old books and with the new. When, an hour later, he 
returned he found Mr. Brown there and the new books 
there, but the old books had disappeared, nor did young 
Mr. Miller ever see them again. 

So far as the world knows, only two other persons 
had that pleasure. 

Some time after Mr. Miller had departed in search 
of luncheon, in came, for no particular purpose, young 
Mr. Yost. Mr. Yost was private secretary to Mr. 
Leland Stanford, who was president of the Central Pa- 
cific and one of the owners of the Contract and Finance 
Company. Mr. Yost saw the old books. He saw them 
in the hands of Uncle Mark Hopkins. And Uncle 
Mark, with his coat off, was busily at work packing 


those books into boxes and fastening the boxes with 

The next day Mr. Brown started for Europe. There- 
after all trace of the old books was lost ; also all trace 
of the books of Charles Crocker & sCompany, the con- 
tracting firm to which the Contract and Finance Com- 
pany was the successor. 

By some persons the loss was grievously mourned, 
these being chiefly persons that had certain lawsuits 
and needed the books for evidence. But their grief 
availed them nothing, even when it led them to cause 
the arrest of the most eminent officers of the Central 
Pacific and when, in a dirty, common police court, 
these gentlemen were compelled to declare their igno- 
rance about the books that never were found. Accord- 
ing to a current belief in California, these books now 
repose at the bottom of the River Seine, which is in 
France; and that seems a very strange place indeed — 
for books to repose in. 

For about a year young Mr. Miller discharged the 
duties of secretary to the Contract and Finance Com- 
pany, being also made secretary to the Western Devel- 
opment Company, another very nice company with 
which we are to deal later. It had the same stockhold- 
ers as the Contract and Finance Company, the same 
functions and the same purposes. 

Some suspicion then arose that his books and ac- 
counts were not in the admirable and apple-pie order expected of first-class accountants and really nice 
companies, and Mr. J. O'B. Gunn, auditor of the Cen- 
tral Pacific, made quiet observation of these matters. 
On his oral report, young Mr. Miller was arrested and 
indicted, charged with embezzlement. We are not to 


conclude off hand that he had been corrupted by evil 
example, which is ever in wait for youth, but only that 
he had grown careless, maybe, or something of that 

He was not at once prosecuted, possibly because of 
his youth or good looks. Instead, certain negotiations 
began, lasting for a month, in which young Mr. Miller 
was every day in consultation with the highest officers 
of the Central Pacific, who were also, by a curious 
coincidence, the highest officers of the Contract and 
Finance Company and its sole owners. 

After a time, Mr. Miller's wife called upon former 
Judge N. Greene Curtis (who had once, as an attorney, 
defended for the Central Pacific a man it desired to 
save from punishment) and engaged him as her hus- 
band's counsel. To him Mr. Miller delivered all his 
memoranda and abstracts. 

The trial of Mr. Miller took place in San Francisco, 
whither meantime the officers of all the companies here 
mentioned had been removed. All the witnesses 
against him were officers and employes of the Cen- 
tral Pacific. 

It appears that the prosecution was afflicted with a 
curious languor, resulting perhaps from the climate, 
which is known to be at times enervating. At the close 
of the trial, young Mr. Miller was acquitted. From the 
courtroom former Judge Curtis went straightway to 
his room in the Cosmopolitan Hotel, took all the ab- 
stracts and memoranda that Mr. Miller had given to 
him, and put them into the grate, where they were 
presently consumed in a cheerful blaze. 

These abstracts and memoranda were of the actual 


cost of the work done by the Contract and Finance 
Company, and the actual amounts received therefor. 

Young Mr. Miller, thus happily cleared from blame, 
disappeared from the public view. The next heard of 
him was as a prosperous farmer and owner of a fine 
ranch in the Sacramento Valley, and as a buyer of coal 
lands. As previously he had been an accountant at a 
moderate salary, followed by a year of idleness and 
(presumably) heavy legal expenses, this affluence oc- 
casioned some remark. Mr. Miller farmed on, never- 
theless, and so, by a figure of speech, did the Contract 
and Finance Company, the Western Development Com- 
pany and the Central Pacific Company. 

How successful was the farming of the Contract and 
Finance Company in behalf of the Central Pacific is 
not a matter of guess work but of record since the 
Pacific Railroad Commission dug into the depths of 
these transactions. It appears that for eight years 
Central Pacific stock was issued, passed around the 
circle of the Contract and Finance Company (or some 
other similar concern) and came by this easy route 
into the possession of the Worthy Four without cost- 
ing them a dollar. Year by year this is the way the 
total mounted of the stock that made this inexpensive 
and delightful circuit : 

Year Amount 

1866 $ 8,580,600 

1867 14,923,400 

1868 24,679,900 

1869 » 40,168,100 

1870 51,079,200 

1871 59,644,000 

1872 59,644,000 

1873 ^ 62,608,800 


On this stock so issued there was paid in seven years 
dividends amounting to $12,000,000 — ^all obtained 
from the public by means of freight and passenger 
rates based upon this fictitious capitalization. In the 
last thirty years that fictitious stock has taken from 
the public not less than $120,000,000 in dividends col- 
lected by such rates — an aggregate almost twice the 
amount of the stock issue. It is collecting that toll 
now. It will continue to collect it until the public that 
pays wearies enough of the imposition to cut out the 
fictitious capitalization upon which the tolls are based. 

The Contract and Finance Company continued to 
build the Central Pacific under the remarkable ar- 
rangement I have described - from the place where 
Charles Crocker & Company dropped out to the junc- 
tion with the Union Pacific, fifty-three miles west of 

How much of the stocks and bonds it received for 
this work represented actual construction and how 
much was surplus was a mystery. 

When the Pacific Railroad Commission tried to as- 
certain the facts, its expert engineer presented to it a 
statement that the entire line of the Central Pacific 
from Sacramento to five miles west of Ogden, 687 
miles, cost to construct, $32,589,117.93. 

Adding the $2,130,000 paid to the Union Pacific for 
the overlapped parts, this makes the total construc- 
tion cost $34,719,117.93, or as I have said before, $50,- 
537 a mile. 

How much of this again was real nobody knows even 
now. But supposing it to be right, the Worthy Four 
had in their possession to offset this expense the fol- 
lowing : 



United States Government bonds $27,500,000.00 

Central Pacific bonds practically guaranteed by the 

. government 27,600,000.00 

Land grant 30,000,000.00 

Assistance voted by California counties, etc 2,000,000.00 


Less alleged cost of construction 34,719,117.93 

And depreciation of currency 7,000,000.00 

Balance $45,280,882.07 

In other words, they built the road for about one- 
half of the government subsidy, and pocketed the rest. 

But in what shape did they take it? In bi)nds on 
which interest must be paid and stock on which divi- 
dends must be dug up. And this legacy of tribute they 
left for the next generation and all others. 

Because in the end, all these assets with the $62,- 
000,000 of stock obtained for nothing and all the other 
perquisites, "melons", good things, grafts, "rake-offs", 
and clever deals, were merged into one of the most val- 
uable railroad stocks in the world, on which to this day 
we are paying the heavy interest charges. 

No sooner was the first transcontinental railroad 
line opened, the gateway established, and the toll taker 
at work, than the Four thus pleasantly endowed began 
to establish other gates to take further toll. They had 
started with next to nothing apiece, and now, after 
nine years, they had shared a stupendous fortune that 
was, indeed, much more than wealth in hand since it 
was an infallible and unceasing machine for gathering 
more and still more wealth. 

As they constructed the Central Pacific, it stopped at 
Sacramento, ninety miles east of San Francisco, with 


which the Sacramento river connected it, as did also 
the Western Pacific, another and earlier railroad proj- 
ect, liberally aided with government grants as an in- 
cipient transcontinental, route. The main line of the 
Western Pacific had its western terminus at San Jose, 
fifty miles south of San Francisco. 

When the Central Pacific was opened for through 
transcontinental traffic in connection with the Union 
Pacific, passengers and freight for San Francisco .must 
make this detour fifty miles southward by way of San 
Jose after they had left the Central Pacific tracks. 
From San Jose the Western Pacific had a branch it 
was building to Oakland on San Francisco's bay and 
opposite the city. 

In 1867 the contractors that had undertaken to build 
the Western Pacific became embarrassed financially, 
and the Contract and Finance Company succeeded to 
the work, completing the line. For this it took in pay- 
ment all of the Western Pacific stock, issued and un- 
issued, all of its bonds and all of its land grants that 
had not been allotted to previous contractors. These 
then become assets of the Contract and Finance Com- 
pany, which it distributed to its stockholders with 
other assets. 

These stockholders were -Messrs. Huntington, "Hop- 
kins, Stanford and Crocker, constituting the Central 
Pacific Railroad Company. The land grants were ex- 
ceedingly rich, and the possession of the road thus 
cheaply secured carried the Central Pacific from Sac- 
ramento to San Francisco Bay and gave it an invalu- 
able terminus. 

We have already noted another rival, the California 
Pacific, which had been projected to build over the 


Beckwith pass through the Sierras to an Eastern con- 
nection. In 1869 it was completing its line from Val- 
lejo to Sacramento by a shorter* and better rout^ than 
the Western Pacific. The Central Pacific tried hard 
to keep the California Pacific from entering Sacra- 
mento, and at one time a pitched battle between the 
armed forces of the two companies was imminent ; but 
while the contestants were waiting for a court deci- 
sion, the California Pacific stole a march and got into 
the city. 

This was in 1870. Being thus defeated, the Central 
Pacific had recourse to strategy. In 1871, it agreed to 
buy the California Pacific for $1,579,000. It had pre- 
viously secured a contract for the Contract and 
Finance Company to build and repair certain sections 
of the California Pacific track. When this work was 
done, the Contract and Finance Company presented 
a bill for $1,600,000, which neatly offset the purchase 
price of the California Pacific stock and left a margin. 
Some bonds were used as counters in this unique deal, 
but the substance of it was that the happy four got the 
California Pacific practically for nothing. 

The subtle influences, political and business, \hsA 
were back of these operations were never revealed. It 
is certain, however, that they were not of an ordinary 
business nature; neither the Western Pacific nor the 
California Pacific fell like plums into the Central Pa- 
cific's lap. In the suits of the crowded-out stockhold- 
ers that I have previously mentioned, the allegation is 
made that the Central Pacific was responsible for the 
financial embarrassments of the Western Pacific con- 
tractors and that by manipulation the Central Pacific 
unfairly possessed itself of $2,000,000 of Western 


Pacific bonds and $3,000,000 of other securities before 
it made the contract for the Contract and*Finance 
Company that gave it the line for little or nothing. 

These maneuvers have a direct interest for us, be- 
cause they led to another powerful example of the way 
this railroad capitalization is made. 

As soon as the California Pacific came into their pos- 
session, Messrs. Huntington, Hopkins, Stanford and 
Crocker went through the motions of leasing it to 
themselves at the rental of $550,000 a year. 

That is to say, as directors of the California Pacific, 
which they had acquired for practically nothing, they 
rented the property to themselves, as directors of the 
Central Pacific, which they had acquired for nothing 
at all, and made the rental $550,000 a y^ar. This they 
charged to the operating expenses of the Central Pa- 
cific, where it still figures. Subsequently they in- 
creased the rental to $600,000 a year. The actual value 
of the entire California Pacific stock when they got it 
was less than $3,000,000. They would be charging for 
the property at the rate of 20 per cent a year if the 
stock represented its real value. But it did not. 
Twenty-four years later the sworn value oi the prop- 
erty was $1,404,935. 

In the meantime the rentals on it had amounted to 
$13,600,000 — almost ten times its value, on which the 
annual rental was 43 per cent. This rental had been 
paid regularly to the worthy four and charged to the 
operating expenses of the Central Pacific. It was a 
part of the exhibit the Central Pacific made whenever 
it wished to increase rates or reduce wages. It must, 
of course, make enough money to pay its operating 
expenses^ first, and th^n returns on the capital in- 


vested. We have already seen what the capital invested 
really was. Here is a good chance to learn things about 
its operating expenses. 

Upon such expenses with others more or still less 
legitimate, and upon capital piled up as this had been 
rates were made and are still made that the public 
must pay. Upon such expenses and such capitaliza- 
tion the railroads go before the Railroad Labor Board 
and demand and secure a reduction of wages. 



C. The Sunset Line. 

A year or two before Collis P. Huntingrton died, some 
newspaper asked him to tell a wondering world how 
he had accumulated his colossal fortune. 

"I made my money," said the sage, 'ly going into 

For some reason the words were regarded in some 
quarters as a talisman. Young men were urged to re- 
gard them -thoughtfully as expressing the secret of 
getting on in the world. 

It was not explained to them that Mr. Huntington 
was indulging in a bit of neat word play. The debt 
that he went into was never one that he owed to other 
persons. It was always a debt that he managed to 
have other persons owe to him and on which he col- 
lected gorgeous revenues. 

There were other maxims about making money 
quickly (at the public expense) that Mr. Huntington 
might have confided to the innocent reporter; maxims 
illustrated from h^ own career. For some reason he 
omitted them, but we need not lose their lesson on that 
account. Anyone that will go over these records will 
be able to see what they are. 

For instance, the quickest way to make money is to 
issue and manipulate railroad securities without pay- 
ing for them. 



If you can bond a railroad enterprise, then do its 
construction work at extravagant or fictitious prices, 
then take its bonds to pay you for the work and its 
stock as a bonus you have something better than any 
gold mine. 

You can call all these bonds and stocks ''capitaliza- 
tion" and insist that it is holy and sacred and get 
away with that idea. You can assert that you are en- 
titled to interest and dividends upon it, and the courts 
and the press and Congress will agree with you. Then 
you can charge the public whatever rates may be neces- 
sary to produce the interest and dividends, and if the 
rates you charge fall short for any reason Congress 
will appropriate money from the national treasury to 
make good the deficit. 

You could not do this in any other business. You 
could not do it in the railroad business in any other 
country. But you can do it in the railroad business in 
the United States of America, for here is the proof 
that you can. 

Mr. Huntington had some other ideas about making 
money, almost as valuable. 

One of them was to create a monopoly of the carry- 
ing trade and then enjoy the harvest that only a well- 
designed and extensive monopoly can gather. 

When the worthy four got the California Pacific 
they picked up with it as incidentals two other inde- 
pendent railroad projects, the San Francisco & North 
Pacific and the San Francisco & Humboldt Bay. These 
had together a nominal capital of $17,200,000. 

Having these highways, Western Pacific and the 
California Pacific, the Central Pacific had all Calif or- 


nia in its grip and could charge the public what it 
might be pleased to charge. 

Mr. Huntington seems to have conceived this early 
in his career as a railroad magnate. To maintain at 
whatever cost an absolute monopoly of the traffic; to 
allow the public no chance to escape; and to control 
the state through the control of the primal necessity 
of transportation was his idea of good business. For 
many years he devoted to this object more attention 
than to all other objects together, until he was obsessed 
by it. 

Now he looked out upon the field and saw his su- 
premacy might be threatened from two directions. On 
the north, the Northern Pacific* was advancing from 
St. Paul ; on the south, he was menaced by the Texas 
Pacific and others. He determined to fortify both 

He saw that from the south, where the easy routes 
were, he faced most danger. Therefore, as soon as 
the Central Pacific was completed, he and his three 
friends organized a new company, the Southern Pa- 
cific Railroad Company, to build a line southeastward 
from San Francisco and so seize and hold the south- 
ern gate. 

The new company was constructed upon the lines 
that had proved so deliciously productive in the case 
of the' Central Pacific. ' The worthy four of Sacra- 
mento were the sole owners. They subscribed for the 
stock and paid no more for it than the law compelled 
them to pay in order to organize. 

For the rest they depended upon the generosity and . 
gullibility of Congress and upon that staunch and 


effective piece of money-making machinery, the Con- 
tract and Finance Company. 

This company had not gone out of business when the 
Central was completed. Not for a moment. It had 
continued to function in its own peculiar way to con- 
ceal profits and distribute them where they would do 
the most good — ^to Messrs. Huntington, Hopkins, Stan- 
ford and Crocker. They had made with it a most re- 
markable contract, for instance, in regard to the Cen- 
tral Pacific's maintenance and repairs. The Central 
Pacific provided all the tools, shops, plants and power. 
The Contract and Finance Company took these and 
worked them and then charged the Central Pacific ten 
per cent profit on all the work that was done. / 

This was then charged to operating expenses and 
maintenance account, and these accounts thus artifi- 
cially increased were made the basis of rates for carry- 
ing pasengers and freights and a limit for wages. 

The 10 per cent thus collected found its way, of 
course, to the private purses of the worthy four. 

The Contract and Finance Company did the collect- 
ing. Collecting for its owners was one of the bqst 
little things it did. 

It was now set to work to perform its peculiar min- 
istrations for the new company, the Southern Pacific. 

The first object, we are to remember, was to get the 
road built without expense to the four and then de- 
liver it as a gift into their hands, with whatever other 
wealth might be garnered as they went along. But 
always without expense to them or any investment, if 
that could be avoided. 

Congress was first besought to give its aid, and be- 
stowed upon the Southern Pacific half the land in a 


strip forty miles wide along its entire line or (as be- 
•^ore noted) 12,800 acres for every mile constructed. 
The State of California gave thirty acres of land at 
Mission Bay, San Francisco, an enormously valuable 
gift. The city of San Francisco gave $1,000,000 in 
cash; other counties and cities along the line made 
donations that totaled a little more than $1,000,000. 

The contract which the four as the Southern Pacific 
Railroad Company made with themselves as the Con- 
tract and Finance Company called for the building and 
equipping of the entire line for $40,000 a mile, to be 
paid in first mortgage bonds "and the balance in capi- 
tal stock." What was meant by "the balance" was and 
remains mysterious. The whole road cost to construct 
about $25,000 a mile. The first mortgage bonds would 
pay for that and leave a big margin. 

All this was lovely— for the gentlemen that got the 
benefit of it.- But there was still one difficulty. The 
bonds to pay for the construction work could not be 
issued beyond the issue of stock. The stock could be 
issued only for cash — or its equivalent — for the law 
said so. It was necessary, therefore, to get some ac- 
tual money, ready cash in hand, with which to start 
the work; also to make a payment upon the stock to be 
issued to pay for the work. After that all would be 
easy. Bonds would be issued to the amount of the 
stock put out. The bonds would pay for the actual 
work. The stock would be exchanged for the receipted 
bills of the contracting company as had been done in 
the case of the Central Pacific. It would then become 
an a^set of the contracting company and be distrib- 
uted among the stockholders of that company. Those 
stockholders were the worthy four and they would 

94 RAILROAD MELONS, RATES AND WAGES endowed with all the stock of the Southern Pa- 
cific without paying for it. 

But there must be funds to start with. 

Now the experience, practice and instincts of the 
four were all against putting any money of their own 
into a railroad enterprise. Why should they when 
they could get other people's and control it as if it 
were their own? The Central Pacific was now doing 
a great and profitable business. So they went to the 
treasury of the Central Pacific and helped themselves 
to what they needed — cash, coupons, bonds and other 
useful trifles although strictly speaking these things 
did not belong even to the Central Pacific but to the 
government and people of the United States. 

Twice they raided the Central Pacific's sinking fund 
or other surpluses, obtaining once $3,000,000 and once 

With funds so secured much railroad line was built. 
On lines so constructed bonds were issued, and stock. 
Bonds and stock so issued were delivered to the Coil- 
tract and Finance Company in payment of construc- 
tion work done at abnormal prices. Finally, as assets . 
of this company, the bonds an^ stock were distributed 
among its stockholders, exactly in accordance with the 
desires of the fortunate four and to their great profit. 

Not a cent of the stock got upon the market. It all 
went by this route into the coffers of the four,* who got 
it without paying for it. Also, it all went to be added 
to the total capitalization of the enterprise upon which 
passenger- and freight rates have been based ever 
since, and upon which the Railroad Labor Board makes 
its solemn rulings about wages. 
Millions upon millions of so-called capitalization were 



thus created by the mere operation of the printing 
press that printed it. None of it represented invest- 
ment ; none of it any service to the public. 

For the railroad might have been constructed out 
of the bonds and the land grant without a cent of 
stock. It might almost have been constructed out of 
the land grant ^lone. 

Much of the nation's land that the government had 
bestowed upon this private enterprise in fortune mak- 
ing was exceedingly fertile and valuable. Calculating 
it at but the nominal price, $2.50 an acre, the land 
grant from San Francisco to the southeastern boun- 
dary of California was worth $29,824,000. Supposing 
the construction to have cost $40,000 a mile, which is 
$15,000 beyond the actual figures, it would have cost, 
for the same distance, only $37,000,000. 

The Contract and Finance Company functioned well 
about these peculiar relations, but in 1875 its four 
owners took the unusual step of disincorporating it, 
which enabled its affairs to be wound up and |ts books 

In its stead was organized the Western Development 
Company — same ownership (with the addition of 
David D. Colton), same purposes, and $5,000,000 of 
capital, of which not a dollar was paid in. 

It succeeded to the contracts of the Contract and 
Finance Company, including the Southern Pacific 
work. How well it fared on its way through fertile 
fields we may judge from the fact that on September 
4, 1877, two years after it started, it distributed among 
its stockholders the following assets it had accumulated 
in its unusual functions : 


Southern Pacific stock $13,500,000 

Southern Pacific bonds 6,300,000 

Amador Branch bonds *. 675,000 

Berkeley Branch bonds 100,000 

Los Angeles Branch bonds 13,500 

Amador Branch stock 674,000 

Berkeley Branch stock 100,000 


Total for this sitting $21,362,500 

The Western Development Company lasted three 
years, when it followed the Contract and Finance Com- 
pany into the limbo of things better forgotten, and 
was succeeded by the Pacific Improvement Company, 
same owners (except one, for David D. Colton was 
dead), same purposes, same capital, same absence of 
payments therefor. This company, inheriting the con- 
tracts of the Western Development Company, carried 
the building of the Southern Pacific to the state boun- 
dary at the Colorado River, and thence across Arizona 
and New Mexico, where had been organized by the 
same owners the Southern Pacific Railroad Company 
of Arizona and the Southern Pacific Railroad Com- 
pany of New Mexico. 

^ The Southern Pacific of Arizona had an authorized 
capital of $20,000,000 (none of which was paid in), 
and bonds of $10,000,000. The Southern Pacific of 
New Mexico had similarly a capital stock of $10,000,- 
000 (none of which was paid in), and bonds of 

The Pacific Improvement Company built for the Ari- 
zona road 384.17 miles, and for the New Mexico road 
107.25 miles. The contract called for $25,000 a mile 
in bonds and practically all the stock. 
The stock, of course, found its way by the usual cir- 



cuit, into the possession of the fortunate four, who 
thus secured it for nothing. 

A few years later, because of the passenger and 
freight rates based upon this fictitious capitalization, 
that same stock, for which nothing was paid, which 
represented no investment but only luck and devices, 
was worth $137 a share. 

When the Southern Pacific was completed it was 
leased by its owners to themselves as the Central Pa-"^ 
cific, the lease being another example of extravagant 
rentals charged to operating expenses, and thus made 
the basis for rates and for wages. The Pacific Im- 
provement Company likewise seems to have done a 
prosperous trade in its line. At a meeting held April 
11, 1882, as shown by its minute book, it distributed 
among its stockholders these securities that it had 
gathered in its own sweet way : 

Southern Pacific of Arizona stock $19,994,800 

Southern Pacific of Arizona bonds 2,572,000 

Southern Pacific of New Mexico stocks 6,688,800 

Southern Pacific of New Mexico bonds 4,180,000 

Monterey Railroad Company stock 284,000 

Monterey Railroad Company bonds 248,000 

Total ^t this sitting $33,967,600 

I find alSo that, in 1894, it transferred to the land 
department of the Central Pacific Railroad property- 
worth something like $20,000,000, including more than 
125,000 acres of rich land and 125 town sites on the 
line of the Southern Pacific of California. From which 
I infer that in the midst of other and exacting cares 
the thrifty owners had not overloked the profit that 



lies in knowing where the stations are to be placed 
when you lay out a railroad. 

But to return to earlier history. While the South- 
ern Pacific was reaping bonds and things as it moved 
eastward, Mr. Henry Villard, in control of the North- 
ern Pacific, was rapidly pushing westward. His main 
object was Portland, but men foresaw that he would 
wish to build a branch southward toward San Fran- 

The Central Pacific undertook to check him by build- 
ing north a line called the California and Oregon Rail- 
road and by forming an amalgamation called the 
Northern, both constructed in the same way by the 
Western Development Company or by the Pacific Im- 
provement Company, on terms that filled the coffers 
of the four gentlemen and piled up capitalization and 
interest thereon. 

I cannot do more than give some bare idea of these 
operations by citing a few instances from many, for 
to relate all the myriad sources of profit would fill a 
great volume. There was one piece of road 103 miles 
long from Delta, California, to the state line, belong- 
ing nominally to the California and Oregon branch of 
the Central Pacific's happy family and constructed by 
the Pacific Improvement Company. On this the price 
charged for construction was $4,500,000 in bonds ad 
50,000 shares of stock, together worth in the market 
$8,340,000. The actual cost of construction was 
$3,505,609 ; the net profit, representing also an unnec- 
essary addition to the debt load that we must pay, was 

Mr. Huntington should have added to his formula 
for making fortunes the ownership of a good, reliable 


printing press and the oportunity to issue railroad 
securities from it. These beat all the maxims that 
ever were invented. 

In the same manner, these gentlemen organized the 
South Pacific Coast Railroad Company, with a line 
eighty miles long, on which the bonded indebtedness 
was $5,500,000 and the stock $6,000,000. The bonds 
alone represented almost $70,000 a mile. All of the 
bonds and all of the stock were taken by the Pacific 
Improvement Company for building the road, and in 
1886 the Pacific Improvement Company passed along 
all of these securities to the Southern Pacific, whose 
owners had gbne through the formality of leasing 
their property to themselves on an arrangement that 
left the rental and the interest on the bonds and divi- 
dends on the stock (if any dividends were paid) all to 
be dug out of the road by means of freight and passen- 
ger rates. 

Similar processes were followed with the Northern 
and with the Northern California. The Northern was 
an accretion of ten smaller roads, most of them leased 
one to another in the manner I have described. Thus 
the first section was leased to the second at an exces- 
sive rental which the second charged to operating 
expenses. The second was then leased to the third at 
another excessive rental, including the first, and the 
third to the fourth until at the end of the line appeared 
a colossus of rentals mased into huge operating ex- 
penses, useful to conceal profits and to fool commis- 

In this instance the Northern Railroad (assumed 
name — ^it was really a Southern Pacific enterprise) 
managed to pile up a stock issue of $9,182,000, with 


bonds at the rate of $30,000 a mile for 386 miles, its 
total mileage. In the end this conglomerate with all its 
leases was leased to the Southern Pacific and its stock 
exchanged for Southern Pacific stock in the hands of 
the toll taker, and the whole thing dumped on us — 
who pay. 

Year after year the interests of these men spread in 
many directions. Easily; they were known to be im- 
mensely rich; they had prestige and power. They 
went into politics, legislation, banking, land-owning, 
navigation, religion, education, newspapers, society, 
and with particularly unfortunate results to the pub- 
lic they went into street railroads. They increased 
their investments and power and turned the profits 
made from one greedy enterprise into power to secure 
more greedy enterprises and gain more profits and 
more power. 

Sometimes abnormal power like this is used as a 
bandit uses his pistol, sometimes as a confidence man 
uses his skill and daring. The next incident we are to 
relate the reader can easily classify for himself. I may 
remark that as an exception to the general rule it has 
little connection with the subject of capitalization, 
which we are pursuing in this humble treatise, but is 
thrown in for our refreshing as we go along. Also to 
show how great and lawless is the might that we in 
this country have allowed organized wealth to assume. 

We go back first to the stage coach days. When 
John Butterfield's twenty-one-day stage from St. Louis 
via El Paso to San Francisco had been well established, 
the business grew too great for an individual, and a 
company took charge of it. The Civil War, as I have 
said, forced the stages from the easy southern route to 



a road across the center of the country, beginning at 

With this change the company was reorganized and, 
under its new name, Wells Fargo and Company, with 
Louis McLane of New York as its manager, soon be- 
came an institution in the West, operating a great ex- 
press and banking business as well as stage coaches. 
When the Central Pacilic was completed, Wells Fargo 
and Company entered into an arrangement to carry 
on express operations over the railroad. 

The next year, however, 1870, the Wells Fargo peo- 
ple were dismayed to learn that Messrs. Stanford, 
Huntington, Hopkins and Crocker, with Mr. Lloyd 
Tevis, had organized the Pacific Express Company and 
purposed to compete for the express-carrying trade. 
Competition with the men that owned the railroad and 
could do what they pleased with rates was no competi- 
tion at all, but merely a game of stand and deliver. 

The Pacific Express Company went no farther than 
to print some stationery and open an office, when Wells 
Fargo and Company surrendered. For a gift of one- 
third of the capital stock of Wells Fargo and Company, 
the Pacific Express Company agreed to go out of busi- 
ness. ^ 

One-third of the Wells Fargo stock was $3,333,- 
333.33, thus acquired for the cost of a bunch of sta- 
tionery. This seems fairly good business. 

Afterward the new stockholders put up one-third 
of $500,000 to develop the banking end of the Wells 
Fargo concern. Still later, $1,250,000 of Wells Fargo 
stock was issued to the Central and Southern Pacific 
(Stanford, Huntington, Hopkins and Crocker) in re- 
turn fo? a new traffic arrangement, and the whple 


great business of the express company passed into the 
hands of the railroad, where it remained until the be- 
ginning of 1910. Then a new organization brought 
forth fresh melons, more water and more tribute from 
the nation. 

These I cite as examples of the great profits. But 
the thrift of the fortunate gentlemen despised tiot the 
day of small things. 

They built for $40,000 a bridge over the Colorado 
River, and owning it themselves, they leased it to the 
Southern Pacific, which they controlled, at $12,000 a 
year, and this they charged into the railroad's operat- 
ing expenses and made a basis for rates. 

They bought the steamer Solano, worth $100,000, 
and, owning it themselves, they leased it to the North- 
ern Railroad, which they controlled, at $90,000 a year, 
and they charged the $90,000 into that railroad's op- 
eration expenses and made it likewise a basis for rates. 

They added to the capital items that represented no 
investment, and they added to the operating expenses 
items that were only curtains to conceal profits they 
gathered, and they made these also a basis for rates. 

All this time at the old original Central Pacific gate- 
way, the takings had been goodly and incessant. As 
soon as the cars began to run over the Sierra Nevada, 
the surplus earnings began to accumulate. At first 
these seem to have been used to build other lines, but 
by September, 1873, the business was so good that, in 
addition to the money slipped over to side enterprises, 
there was plainly enough for a dividend. From that 
time and with the exceptions of 1878 and 1879, the 
dividends ranged from 6 to 10 per c^nt a year until 


Then, without explanation, the dividends stopped. 
That same year, 1884, the stock was quoted at 80 and 
more, though it could not be said to be on the market, 
and now, for the first time, the owners parted with 
their control of it. - The bulk of their holdings in Cen- 
tral Pacific they sold to an English syndicate under a 
remarkable arrangement that left the original holders 
still in the management of the property. After that 
the road ceased to be profitable. It is to be remem- 
bered that only Central Pacific stock was sold. The 
original holders retained their stock in the Southern 
Pacific, which might now, of course, be deemed to be 
a rival line to the Central Pacific — ^from whose earn- 
ings, in part, it had been built. 

It appears that at this time there was no lack of 
freight, of income nor of prosperity with the South- 
ern Pacific. The blight that had fallen upon the enter- 
prise was confined to the Central Pacific. 

After this had lasted for some years, the English 
stockholders sent over Sir Charles Rivers Wilson, who 
was afterward president of the Grand Trunk Rail- 
road, to see what could be done to help them in their 
predicament. Wilson succeeded in wresting from the 
four an agreement that the English stockholders were 
to have 1 per cent a year on their holdings until an 
*^adjustment" could be made with the United States 
^goveimment conc/emihg the Central Pacific's debt; 
after which they might hope for more. 

"Adjustment" was the word used. What was really 
meant, as afterward appeared, was something quite 
different. The government had issued bonds to enable 
the Central Pacific to be built. These bonds, origi- 


nally a first mortgage on the property, had been 
changed by Mr. Huntington's skillful work in Wash- 
ington into a second mortgage. But mortgage they 
still were and therefore a burden upon the property. 
No interest had ever been piid upon them by the- rail- 
road company; the government had been advancing 
interest as it had advanced the principal. Many per- 
sons believed that some day the obligation thus accu- 
mulating must be met. So long as it remained it kept 
down the value of the stock. The managers of the 
company hoped to be able to induce Congress to can- 
cel the obligation. That was what they meant by "ad- 

Before the truce with the English stockholders was 
concluded, Wilson is said to have made a report on con- 
ditions as he found them, and this report is said to 
have been known to the officers of the Southern Pacific 
Railroad Company, and is also said to have contained 
some extremely plain language of a kind that would 
have been very interesting indeed to the American 
public if it had made its way into the press. 

The market price of the stock declined until it 
reached 7^^. Subsequently it was understood that the 
English investors had disposed of their holdings at the 
bottom figures, and in 1889, the public learned that the 
stock had found its way back to its original holders. 

I trust that the essence of this transaction is suffi- 
ciently clear without further elaboration. 

But to return to our chronology. 

Here is a list of the dividends paid before the un- 
fortunate English came into the road ; 







Amount Paid 




































, 2,171,020 









1877 . 


















































All this upon stock for which nothing was paid, that 
represented in no way an investment in the enterprise, 
but was regarded nevertheless as a basis for the pas- 
senger and freight rates that collected from the public 
the dividends to be viewed in the above table. 

To this day it is regarded as such a basis. Because 
of it rates are increased ; wages are diminished. 

I have still to relate the marvelous success that at- 
tended the efforts of Mr. Huntington to win donations 
from Congress. This I will reserve for another chap- 
ter that we may examine at leisure what relation it 
had to capitalization, rates and wages. But we might 
do well to pause at the year 1884, when temporarily 
Central Pacific stock passed out of the hands of the 
original owners, and see how they had fared. 


They started in 1861 with a total wealth among 
them, according to their sworn statements, of $108,- 

In twenty-three years they had won $34,308,055 in 
dividends on their original enterprise, had enjoyed the 
almost incalculable profits arising from mechanical 
million-making contrivances such as the Contract and 
Finance Company and the Western Development Conir- 
pany, and they and their heirs and asociates controlled 
5,906 miles of railroad with total capital st^ck of 
$219,000,000 and bonds of $235,000,000, a total capi- 
talization of $454,000,000. 

Colossal wealth — ^and colossal power to gain more 
wealth to become in turn more power. 

Whosoever holds the highways of any country holds 
that country. True is that word. You can see its truth 

Aside from this, if the fortunes made in the way I 
have described could have remained merely fortunes, 
segregated and enjoyed by their owners, we could read 
of them and wonder and pass on. But the truth is 
that the making of these fortunes, created out of debt 
and based in reality upon the power to tax the public, 
was the origin of a great and steadily growing evil, 
now become more menacing than any problem any na- 
tion has ever dealt with. 

Look back and see. When, in 1880-81, the Southern 
Pacific was completed across New Mexico, and leased 
to the Central Pacific, Mr. Huntington, always the con- 
trolling spirit, saw his way to great strides in rail- 
road combination. Tom Scott had failed to build his 
Texas Pacific to California and was out of the way. No 
other rival need be feared in the South. 


Mr. Huntington and his friends organized the South- 
em Development Company on tBe lines of the old Con- 
tract and Finance Company and for the same purpose. 

Through this concern, and in other ways, he built 
and absorbed lines in Texas and Louisiana until he had 
a railroad through from San Francisco to New Or- 
leans, with connecting steamships thence to New York. 
Then he effected consolidations of all the*roads owned 
and leased by the Sacramento Big Four, issued flood 
after flood of stocks, exchanged all the stock issued 
for construction into the dividend-:paying securities of 
the amalgamated company, and finally massed the 
whole into the Southern Pacific Company, of Ken- 
tucky, with $74,866,463 of preferred and $197,849,259 
of common stock, paying 7 per cent dividends on the 
preferred and 6 per cent on the common, and owning 
besides $415,330,000 of stock in proprietary com- 
panies, to say nothing of bonds — ^an exhibit at which 
the observer may well stand aghast, and to which there 
is no parallel in the world. 

For most of these stocks no money was ever paid. 
They represent no investment. Only clever and suc- 
cessful scheming. 

On all of them we furnish year by year the profits, 
collected from the living expenses of the masses. 

In this grand total of dividend-bearing securities is 
included all the stocks gathered in so many devious 
ways by the Contract and Finance Company, the West- 
em Development Company, and the Pacific Improve- 
ment Company, so that not one dollar represented by 
these transactions is today without its direct signifi- 
cance to you and me, for we furnish those dividends. 

D. The Control of Government 

In a little more than two decades — 1898 to 1920 — 
American railroad rates, both passenger and freight, 
were practically doubled. 

After 1920 when the railroads secured their greatest 
rate increase, the same railroads made ceaseless efforts 
to have railroad wages reduced. In the end they got 
a majority of the Railroad Labor Board to agree with 

In all these controversies, about rates and about 
wages, the plea of the railroads was that without more 
money and less expense they could- not earn a profit oil 
their capitalization. 

In the railroad business, then, everything turns on 
capitalization. We have seen from sample chapters 
of history how a part of this capitalization is made 
and why it is that the public must pay high rates and 
the employes have low wages to meet these demands. 
We ought now to go a little farther and observe the 
railroad in politics and see how that bears upon the 
capitalization question. 

It is said that railroads do not meddle now in politi- 
cal matters as once they did, and therefore we should 
forget the old days when they bought conventions, 
"persuaded" Congressmen and kept politicians on 
their salary lists. 


We need pay no attention to any such advice. In 
the first place, the railroads are just as much in poli- 
tics now as they ever were; as much and more. Not 
in the old ways; that is true enough. Methods have 
changed ; the essential fact remains. In the next place, 
the crude methods of other days, when a man with a 
fountain pen and a book of blank passes used to stand 
at the door of a state convention and buy delegates as 
he would buy potatoes, had plainly a most direct rela- 
tion to this supreme matter of capitalization. The 
more refined methods of today have a relation to the 
same matter, as certain if not as obvious. 

When railroads used to buy a legislature or bribe a 
governor or corrupt a Congressional district they add- 
ed the cost to the capitalization, and it is there now, and 
we have to pay for it with the rest. We set out to ex- 
amine the different kinds of capitalization on which 
rates are based and wages reduced. Here is one that 
we cannot overlook however much the hired pen valets 
of the reactionary press advise us to forget it. 

But first I wish to go back to that statement of mine 
that the railroads are in politics just as much as they 
ever were, because it will probably be attacked, or 
questioned, and we may as well see whether I am right 
or the various writing parrots that will fall foul of it. 

A report of the Interstate Commerce Commission 
of 1921 says that the capital stock of all the American 
railroads consists of 97,175,776 shares, of which a ma- 
jority, or 50,873,322 shares, are held by 8,031 stock- 

This proves that the control of the whole railroad 
system is in the hands of a few very wealthy men and 


These 8,031 stockholders include coi5)orations, 
trusts, voting trustees, estates, banks and the like. 
They also include the 24,638,407 shares of railroad 
stock that are held by other railroads. Other rail- 
roads^, voting trusts and corporations own 42,000,000 
shares of American railroad stock, or nearly one-half 
of the whole. 

To this startling fact almost no attention has been 
had. Yet it has a world of meaning. It means that 
the ownership of the American railroads is drifting 
steadily into the hands of the great Central Financial 
Interests that control the country's currency and 
banking, are absorbing daily its great basic industries 
and are manifestly shaping its policies. 

Ten years ago the Supreme Court ordered the sepa- 
ration of the Union Pacific and Southern Pacific, on 
the ground that when they had been combined by E. 
H. Harriman the Anti-Trust act of the venerable 
Sherman had been violated. 

For some time the order caused perplexity in our 
highest government circles. At last a happy solution 
was found. It was that the Southern Pacific should be 
taken over by the interests that controlled the Penn- 
sylvania and the Union Pacific by the interests ihat 
controlled the Baltimore & Ohio. 

When this had been neatly arranged some mischief 
maker turned up the engaging fact that the interests 
that controlled the Pennsylvania and the interests that 
controlled the Baltimore & Ohio were the same. 

The discovery caused comment then. It would cause 
none now. It would be exactly what we expect. For 
there is now no competition among the railroads. 
Gradually all have been pulled nearer and nearer to 


the overshadowing and all-powerful combination that 
hourly multiplies its power as it multiplies its hold- 

To say that this great power is not in politics and 
does not interfere with government is preposterous. 

It does not bribe delegates nor hire bosses. It puts 
forth its irresistible influence upon the seat of govern- 
ment, and the next thing we know the United States 
has annexed Nicaragua at the behest of one banking 
house and Hayti at the comand of another and violates 
its pledged faith to the Philippines at the suggestion 
of another. 

It is no longer necessary to buy conventions and 
deal in vulgar briberies. Let ten thousand newspapers 
report to us every day the same invention and we go to 
the polls and vote as the Interests desire, no matter if 
with the same ballot we vote away our liberties. 

Great Interests are always in politics. They thrive 
by privilege. From government they obtain the privi- 
lege upon which they tJirive, The more they ttirive 
the greater their power; the greater their power the 
more they thrive* It is the simplest thing in the world 
and the surest. 

If any man thinks the Interests that control the 
railroads are not in politics let him contemplate the 
fate of every man and every party that has under- 
taken to combat those Interests. 

Let him read the decent history of North Dakota. 

Methods change. The essential fact remains. Priv- 
ilege is the gift of government now as surely as when 
CoUis P. Huntington first projected his huge frame 
and magical manner of "explaining things" upon a 
susceptible Congress. 


If there had been nothing else the early relations 
of the fortunate four of Sacramento to the fountain 
head of privilege would have been enough to lead them 
into politics. Mr. Huntington had induced the federal 
government to issue in their behalf $27,000,000 of 
government bonds. These were a lien on their prop- 
erty; they were obligated to pay the semi-annual 
interest on it. So far they had defaulted on these pay- 
ments. They purposed to continue to default on them 
and in the end to dodge principal as well as interest. 

Their only chance to succeed in any such scheme was 
to become a great political power, and first of all to 
own the state of California and wield it as a solid block 
in Congress and in the national conventions. 

There was also to be considered the chance of enor- 
mous profits that lay in getting f ron^ Congress more 
rich grants from the public domain for their various 
plans of railroad extension, because in one such grant 
would lie a return greater than the entire cost of po- 
litical control, including the expenses of "explaining" 
many things to many public men ; and there must have 
been something very alluring in the idea of defraying 
by public grants the cost of heading off competition 
and maintaining the traffic monopoly of the West. 

The wonderful career of Mr. Huntington in Wash- 
ington showed the way by which these things could be 
done. He had laid the cornerstone of the enterprise 
in political manipulation and the secret control of pub- 
lic officers. But for his achievements with Congress 
there would have been no great fortunes for him and 
his associates, and without the like achievements in 
Sacramento and Washington no more millions could 


be added to these fortunes even if still greater dis- 
asters did not occur. 

Governor Stanford at all times, Mr. Crocker much 
of the time, and Mr. Hopkins some of the time, looked 
out for Sacramento. I shall recite now some of the 
strange expenditures they made. In some cases these 
were charged up to "expense," in some to "legal ex- 
penses;" in all cases they were without explanation. 
You are to understand that I am quoting from an in- 
complete list, covering only a few of the years : 


Dec. 31. Leiand Stanford , $171,781.89 

Dec. 31. Leiand Stanford 8,877.15 

No date. Leiand Stanford 15,137.00 

Dec. 31. Leiand Stanford 15,177.33 


Feb. 6. Western Development Company 26,000.0p 

Feb. 8. Leiand Stanford 20,000.00 

Feb. 17. Leiand Standord. 20,000.00 

July 30 to Sept. 30, 1877. Leiand Stanford 83,418.09 

Aug. 30. D. D. Colton .^ 1,000.00 

Sept. 22. 'Western Development Company 50,000.00 

Sept. 22. .Western Development Company 29,974.13 

Nov. 2. D. D. Colton 7,500.00 


S^pt. 7. Leiand Stanford 50,000.00 

Oct 26. Mark Hopkins 6,000.00 

Nov. 1. Leiand Stanford 83,418.00 

Dec. 27. Leiand Stanford 52,500.00 


Feb. 14. Leiand Stanford 10,000.00 

June 7. Leiand Stanford 13,000.00 

June 28. Leiand Stanford 111,431.25 

Sept. 3. Leiand Stanford y 12,000.00 

Sept 4. S. T. Gage 3,000.00 

Sept 27. Leiand Stanford 38,156.03 

Oct 4f P, Df Colton 3,290.00 


Nov. 12. Leland Stanford 48,816.94 

Nov. 12. Leland Stanford 18,168.71 


Mar. 25. G. Crocker 26,452.60 

Mar. 28. C. Crocker 3,100.00 

May 1. C. Crocker 40,000.00 

May 6. C. Crocker n . . 40,000.00 

June 29. Western Development Company 40,745.25 

July 23. Leland Stanford 500.00 

Aug. 2. Leland Stanford 789.50 

Sept. 27. Leland Stanford 38,156.03 

When the Pacific Railroad Commission sought to 
learn something about these expenditures Mr. Stan- 
ford, under oath, could not remember about them or 
else took refuge in a refusal to answer, whereupon 
Justice Field and Justice Lorenzo Sawyer of the 
United States Courts sustained his refusal. 

Then the Commission tried to obtain from Charles 
F. Crocker, Vice-President of the railroad and son of 
the original contractor, some explanation of these and 
cognate mysteries. I will give a specimen of Mr, 
Crocker's explanations. He was asked: 

"What was the nature of these payments?" 

To which he answered lucidly : "They were general 
in their character." • 

On being pressed for a more specific definition he 
said that they were "expenses for various purposes." 
Being again pressed to be explicit, he said : 

"Anything and everything that they [the officers of 
the company] might consider advantageous to the com- 
pany and which required the expenditure of money." 

Question — Do you know, directly or indirectly, of 
the expenditure of any money on account of the C6n- 


tral Pacific Railroad Company for the purpose of in- 
fluencing legislation? 

Mr. Cohen (attorney for the company and, strangely 
enough, the man that had brought the suits for the 
cast-out stockholders) — I advise you not to answer 
that question. 

Witness — ^By advice of counsel I decline to answer 
that question. 

Corruption at Sacramento was organized on a busi- 
ness basis. A certain number of senators and repre- 
sentatives were regularly carried on the pay roll as 
"negatives" — ^that is, to kill any legislation the rail- 
road wished to have killed. But for positive action, 
passing laws that the railroad wished to have passed 
or electing United States senators that the railroad 
had nominated, there was another tariff. Of course 
every excursion into the legislative vote market was 
charged to "legal expenses" whence it- went into that 
capitalization upon which we are privileged to pay our 
substance in the increased cost of living. 
^ In 1885 Mr. Stanford had himself elected to the 
United States Senate. The flood of company money 
toward Sacramento appears from the records to have 
reached at that time high-water mark. Some persons 
averred it cost a million dollars to put him over. 
Whatever the expense might have been, it was borne 
by the railroad company and went into the capitaliza- 
tion thereof. 

We shall now, if you please, return to Mr. Hunting- 
ton in Washington and see how he fared in the under- 
world. It is really an extraordinary story, for he went 
there a country merchant without experience in public 
affairs, without acquaintance or influence, and he man- 


aged to win from Congress first one huge grab at the 
public resources and then another, until he appeared 
the king of all lobbyists. In the history of Congress 
no man has come before it with bolder propositions of 
private gain nor maintained them with anything like 
his success. 

Yet about this we should be under no misapprehen- 
sion. Mr. Huntington was no wonder-worker, no spell- 
binder, no wielder of the magic of eloquence. He was 
a practical man. We are not to believe that he entered 
Washington an unlettered trader and by force of argu- 
ment swayed great statesmen to his will. His method 
was to lead- against Congress a band of legislative ex- 
perts> well supplied with money; they did the rest. 

From 1862 to 1896, he spent most of his time in 
Washington and attended and narrowly scrutinized 
every session of Congress. In those thirty-four years 
he passed through Congress many bills that he wanted 
to have passed ; he killed many bills that he wanted to 
have killed ; he utterly wrecked and ruined the almost 
life-long plans of his one great competitor; he exer- 
cised in all administrations and upon most depart- 
ments a sinister and imperial power ; and on only two 
occasions was he really defeated. 

The history of parliamentary government shows no 
fellow to this career. 

I am going to let Mr. Huntington tell what he will 
about it. ^ 

He had in his employ in 1862, and for many years 
thereafter, one General Franchot, quite well known in 
Washington; also one Beard, one Bliss, and others. 
Before the Pacific Railroad Commission in 1887, he 


was asked about the nature of General Franchot's min- 

"He was/' said Mr. Huntington, largely, "a very 
honorable man whom I had known since I was a boy, 
and he had my entire confidence." 

The Commission had discovered (from other 
sources) that Franchot drew from Mr. Huntington 
$30,000 or $40,000 every year without vouchers, and 
Mr. Huntington was asked to throw light on this 
strange fact. He said : • 

"We had to get men to explain a thousand things. 
A man who has not had the experience could hardly 
imagine the number of people that you have to explain 
these matters to." 

Still the Commission was not quite content with this 
luminous answer and wanted to know more. It ap- 
peared that in 1873, for instance, General Franchot's 
work in Washington had cost $61,000, without any 
vouchers. Mr. Huntington sounded still the pipe of 

"He was," said he, "of the strictest integrity and as 
pure a man as ever lived; and when he said to us *I 
want $10,000,' I knew it was proper to let him have it." 

Examination by Commissioner Anderson: 

Question. — How could Mr. Franchot personally earn $30,000 
or $40,000 a year in explaining things to members of Congress? 

Answer. — He had to get help. He had lots of attorneys to 
help him. 
^ Q. — ^Whom did he have? 

A. — I never asked him. 
. Q. — How do you know he had? 

A. — Because he told me so. He said, "For these explanations 
I have to pay out a little here and a little there and that aggre- 
gates a great deal." 


Q. — ^In addition to explaining with words do you not suppose 
they explained with champag^ne and expensive dinners? 

A. — ^Very likely. I never gave a dinner in Washington. 

Q. — ^Was not a great deal of it spent in cigars and champagne 

A. — ^I think so. Not so much, but perhaps some of it was to 
get some able man to sit down and explain in the broadest sense 
what we wanted to have done. 

It appears that up to 1887, the total expenditures of 
the Southern Pacific at Washingrton (without adequate 
vouchers) were $5,497,593. The important point 
about these expenditures is that they were of money 
that really belonged to the people of the United States 
because it was money that should have been paid into 
the National Treasury as interest on the road's indebt- 
edness. To use public funds to induce public servants 
to give away more public funds seems an extraordinary 
achievement in the history of legislation, but one of 
which the Southern Pacific gentlemen seemed easily 

Subsequently Mr. Huntington, examined under oath, 
was asked this question : 

Q. — ^In regard to the range of discussion that was to be per- 
mitted between the members of Congn^ess and the apostles that 
you sent to them, was that generally confined to Mr. Franchot 
and Mr. Sherrill, or did you take a hand in that? 

A. — Probably it was done more or less by General Franchot, 
Mr. Sherrill and myself. 

Q. — As a matter of fact, did they from time to time consult 
with you? 

A.— They did. 

And then for the first and only time in all these ex- 
aminations Mr. Huntington was shaken out of his 
wary self-possession and ability to dodge and twist 


Q. — But what I want to get at particularly is that no portion 
of these moneys was to be considered as covered by the ordinary 
expenditures of a railroad for purchases of property and 
materials. Those would be specific vouchers. So that as to all 
the unexplained vouchers we may assume that they were for 
moneys expended for imparting information to Congress, or to 
the" departments, or for some purpose of that character? 

A. — ^That I cannot say. Most of the money was expended, no 
doubt, to prevent Congress and the Departments from robbing 
us of our proi)erty. 

I put down all these things to complete the strfdy of 
the origin of railroad capitalization, that strange thing 
on which rates fire based and by which wages must be 
determined. It is also a study of an intensely interest- 
ing human document. You observe, no doubt, how 
agilely Mr. Huntington glides over the thinnest places 
and how honest he looks, how plausible he )nakes his 
cause look. 

Eleven years of expenditures for "explaining*' 
things in behalf of the Central Pacific and Southern 
Pacific — ^being some of the unexplained vouchers 
charged to "expenses'* upon which the officers of the 
company refused to throw any light — ^make this show- 

1870 $ 63,581.03 

1871 13,498.72 

1872 « 73,361.83 

1873 7,348.46 

1874 52,844.94 

1875 197,311.54 

1876 299,301.37 

1877 279,573.06 

1878 471,081.06 

1879 244,298.08 

1880 .' 197,809.36 

Total $1,900,009.83 


In the foregoing lists the most interesting exhibits 
are those of 1877-78 when Huntington was defeating 
Tom Scott, and for the years in which the legislature 
was in session at Sacramento. In running over the 
lists of unexplained expenditures one can usually define 
the legislative sessions by the crowded entries. 

In 1884 the sums drawn by Charles F. Crocker with- 
out explanation total $404,710 and in the early part of 
1885, $55,000. S. T. Gage, one of the railroad's legis- 
lative agents, drew out $18,150 in 1884 and $119,341 
in the first part of 1885 — ^about the time that Leland 
Stanford was drawing $40,06&95 for a similarly unex- 
plained purpose. 

Here is the way some of these items look in the rec- 
ords for part of one month : 


Mar. 7. S. T. Gage I $ 2,600.00 

- Mar. 10. Chas. F. Crocker 5,000.00 

Mar. 12. S. T. Gage 3,000.00 

Mar. 16. Chas. F. Crocker 29,000.00 

Mar. 17. S. T. Gage 81,000.00 

Mar. 18. S. T. Gage 3,000.00 

Mar. 19. S. T. Gage 9,000.00 

Mar. 20. S. T. Gage 15,000.00 

Mar. 21. S. T. Gage 21,000.00 

Jiiar. 23. Chas. F. Crocker 15,500.00 

Mar. 23. S. T. Gage for H. H. Cummings 1,250.00 

Mar. 23. S. T. Gage 8,500.00 

Total $153,750.00 

All without explanation. The legislature was in ses- 
sion. It was the legislature that about this time 
elected Leland Stanford to the United States Senate 
to succeed J. T. Farley, Democrat. 

Mr. Huntington was not pleased with the legisla* 


ture's choice. For years he^nd Stanford had been 
growing estranged. The reason is generally under- 
stood in California; but being related to private life 
and scandal need not be gone into here. Huntington 
had thought A. A. Sargent should go back to the Sen- 
ate and he took unusual ways to make known his re- 
sentment when Stanford took the place for himself. 

In 1888 he suddenly gave out an inteifview contain- 
ing a statement that was construed to mean that Stan- 
ford had paid $500,000 of the * railroad company's 
money for his election to the Senate. This angered 
Stanford and an open breach was imminent. It was 
patched up in some way, the common report being 
that Stanford had threatened Huntington with coun- 
ter revelations equally damaging. 

Subsequently Huntington revenged himself by se- 
curing Stanford's removal as president of the Central 
Pacific, which place he had held continuously since the 
organization of the company in 1861. 

Very interesting disclosures might have been made 
on both sides concerning other uses of the company's 
money. Thus it appears now that one of the most fa- 
mous editors of San Francisco was on the pay roll at 
$10,000 a year, a famous Washington correspondent 
for a well-known New York newspaper received $5,- 
000 a year, and one reading the lists iq^ continually 
startled by the recurrence of names that are also the 
names of senators and public officers very prominent 
in their day. 

All of these expenditures are unexplained otherwise 
than as "expenses" or "legal expenses." 

But the final light as to Mr. Huntington's methods 
in Washington and what he meant by "explaining 



things" is contained in his letters to General David D. 
Colton, the new stockholder in the Western Develop- 
ment Company and now become Mr. Huntington's in- 
timate friend and confidant. General Colton was 
strictly enjoined by Mr. Huntington to destroy these 
letters as soon as he had read them. It is reiparkable 
light upon the morality that guided these operations 
that he destroyed none of them but carefully kept them 
all. As many of thein were incriminating, men of the 
world may surmise with what thought they were pre- 
served. After General Colton's death Messrs. Hunt- 
ington, Hopkirfs, Stanford and Crocker deprived his 
widow of the share in the assets of various companies 
to which she thought she was entitled. She brought 
suit and in the proceedings these letters were part of 
the plaintiff's exhibit. 

New York, November 6, 1874. 

Friend Colton: As you now seem to be one of us I shall 
number your letters, or rather mine to you, as with those sent 
to my other associates in California ♦ * ♦ i notice what you 
say of Hager and Luttrell, and notwithstanding what T. says, I 
know he can be persuaded to do what is right in relation to the 
C. P. and S. P., but some political friend must see him» and not 
a railroad man, for if any of our men went to see him he would 
be sure to lie about it and say that money was offered him, but 
some friend must see him and give him solid reasons why he 
should help his friends. Your truly, C. P. Huntington. 

The congressional directories give the names of John 
S. Hager, of San Francisco, as a Senator from Cali- 
fornia in the Forty-third Congress and John K. Lut- 
trell, of Santa Rosa, as a Representative in the Forty- 
fifth Congress. 


New York, November 20, 1874. 

Friend Colton : Herewith I send you copy of bill that Tom 
Scott proposes to put through Congress this winter. Now I 
wish you would at once get as many of the associates together 
as you can and let me know what you then want. Scott sent 
me these copies fixed as he wants them and asked me to help 
him pass them through Congress, or if I would not do it as he 
has fixed them, then he asked me to fix it so that I will, or in a 
way that I will support it. 

Now do attend to this at once and in the meantime I will fix 
it here and then see how n^ar we are together when yours gets 
here. Scott is prepared to pay or promises to pay a large 
amount of money to pass his bill, but I do not think he can pass 
it, although I think that this coming session of Congress will 
be composed of the hungriest set of men that ever got together 
and the d only knows what they will do. ♦ ♦ ♦ 

Would it not be well for you to send some party down to 
Arizona to get a bill to build in the Territorial legislature grant- 
ing the right to build a R. R. east from the Colorado River 
(leaving the river near Fort Mojave), have the franchise free 
from taxation on its property and so that the rates of fare and 
freight cannot be interfered with until the dividends of the com- 
mon stock shall exceed ten per cent? I think that would be as 
good as a land grant. It would not do to have It known that we 
had any interest in it, for the reason that it would cost us much 
more money to get such a bill through if it was known that it 
was for us. And then Scott would fight it if he thought we had 
anything to do with it. If such a bill was passed, I think there 
could at least be got from Congress a wide strip for right of 
way, machine shops, etc. Yours truly, C. P. Huntington. 

New York, December 1, 1874. 

FRfEND Colton: Your letters of November 20th, 21st and 
22nd are received. ♦ ♦ * Has any of our people endeavored 
to do anything with Lowe and Frisbie? They are both men that 
can be convinced. ♦ ♦ * I will see Luttrell when he comes 
over and talk with him, and maybe he and we can work to- 
gether, but if we can brush him out it would have a good effect 
and then we could do ^r at least try to get some better timber 


to work with. ♦ ♦ ♦ And in this connection it would help us 
very much if we could fix up California Pacific income and ex- 
tensions on the basis we talked of even if we had to pay some- 
thing to convince Lowe and Frisbie. Yours truly, C. P. Hunt- 

New York, May 1, 1875. 
Friend Colton: Yours of the 17th of April, No. 17, is re- 
ceived and contents carefully noted. ♦ * * I notice what you 
say of Luttrell; he is a wild hog; don't let him come back to 
Washington, but as the House is to be largely Democratic, and 
if he was to be defeated, likely it would be charged to us, hence 
I should think it would be well to beat him with a Democrat; 
but I would defeat him anyway and if he got the nomination, 
put up another Democrat and run against him, and in that way 
elect a Republican. Beat him. Your truly, C. P. Huntington. 

New York, September 27, 1875. 
Friend Colton: Yours of the 18th with inclosure as stated 
is received. * * * Scott is making the strongest possible 
effort to pass his bill the coming session of Congress. ♦ * * "^ 
If we had a franchise to build a road or two roads through 
Arizona (we contracting, but having it in the name of another 
party) then have some party in Washington to make a local 
fight and asking for the guarantee of their bonds by the United 
States, and if that could not be obtained, offering to build the 
road without any, and it could be used against Scott in such a 
way that I do not believe any politician would dare vote for it. 
Can you have Safford call the legislature together and grant 
such charters as we want at a cost of say $25,000? If we 
could get such a charter as I spoke of to you it would be worth 
much money to us. ♦ * * Yours truly, C. P. Huntington. 

Safford was Governor of Arizona. 

New York, October 19, 1875. 
Friend Colton: I have given Gilbert C. Walker a letter to 
you. He is a member of the forty-fourth Congress, ex-Governor 
of Virginia, and a slippery fellow, and I rather think in Scott's 
interest, but not sure. I gave him a pass over C. P. and got 
one for him on U. P. So do the best you can with him but do 
not trust him much. Yours truly, C. P. Huntington. 


The Congressional Directpry gives the name of Gil- 
bert C. Walker of Richmond, Virginia, as a member 
of the Forty-fourth Congress. 

New York, November 10, 1875. 
Friend Colton : Dr. Gwin is also here. I think the doctor 
can do us some good if he can work under cover, but if he is to 
come to the surface as our man I think it would be better that 
he should not come, as he is very obnoxious to very many on 
the Republican side of the House. * * * I am, however, dis- 
posed to think that Gwin can do us some good; but not as our 
agent but as an anti-subsidy Democrat, and also as a Southern 
man with much influence. 4* * * But Gwin must not be known 
as our man. ♦ ♦ * Yours etc., C. P. Huntington. 

William M. Gwin, of San Francisco, appears in the 
Congressional directories as a Senator from Califor- 
Tiia in the Thirty-sixth Congress. 

December 10, 1876. 
Friend Colton: I had a talk with Bristow, Secretary of the 
Treasury. He will be likely to help us fix up our matters with 
the government on a fair basis. Yours tiruly, C. P. Hunting- 

'Benjamin H. Bristow, of Kentucky, was Secretary 
of the Treasury in the second administration of Grant. 

Here are extracts from other letters signed, "Yours 
truly,, C. P. Huntington," and addressed "Friend Col- 
ton" : 

New York, December 22, 1875. 

* ♦ *^ I think the Doctor will return to California in 
January. I have just returned from Washington. The doctor 
[Gwin] was unfortunate about the R. R. committee; that is, 
there was not a man put on the committee that was on his list, 
and I must- say that I was deceived and he was often with Kerr 
and El was at his rooms and spent nearly one evening. The 
coijunittee is not necessarily a Texas Pacific, but it is a com- 
mercial com. and I have not much fear but that they can be 
convinced that ours is the right bill for' the country. If things 


could have been left as we fixed them last winter there would 
have been little difficulty in defeating Scott's bill; but their only 
argument is it is controlled by the Central. That does not 
amount to much beyond this: It allows members to vote for 
Scott's bill for one reason, and give the other, that it was to 
break up a great monopoly, etc. If these damn interviewers 
would keep out of the way it would be much easier traveling. 

Michael G. Kerr, of Indiana, was Speaker of the 

"Yours of December 30th and the 1st inst., Nos. 120 and 121 
received; also your telegram that William B. Carr has had for 
his services $60,000 S. P. bonds; then asking how much more I 
think his services are worth for the future. That is a very 
difficult question to answer as I do not know how many years 
Mr. Carr has been in our employ or how far in the future we 
should want him. In view of the many things we now have be- 
fore Congress, and also in this sinking fund that we wish to 
establish, in which we propose to put all the company's lands in 
Utah and Nevada, it is very important that his friends in Wash- 
ington should be with us, and if that could be brought about by 
paying Carr, say $10,000 to $20,000 per year, I* think we could 
afford to do it, but of course not until he had controlled his 
friends. They could hurt us very much in this land matter, 
although I would not propose to put the land in at any more 
than it is worth, say $2.50 an acre. I would like to have you 
get a written proposition from Carr in which he would agree to 
control his friends for a fixed sum, then send it to me. * * * 

William B. Carr was an influential politician in San 

New York, January 17, 1876. 
* * * I have received several letters and telegrams from 
Washington today, all calling me there, as Scott will certainly 
pass his Texas Pacific bill if I do not come over and I shall go 
over tonight, but I think he could not pass his bill if I shoidd 
help him; but of course I cannot know this for certain, and just 
what effort to make against him is what troubles me. It costs 
money to fix things so that I would know that his bill would not 


pass. I believe with 1200,000 I can pass our bill^ but I take it 
that it is not worth this much to us. 

New York, January 29, 1876. 

♦ * * * Then on our side we have Sargent, Booth, Jones, 
Cole, and Gorham in the Senate to help us. * * * Scott is 
working mostly among the commercial men. He switched Sena- 
tor Spencer of Alabama, and Walker of Virginia, this week, but 
you know they can be switched back with proper arguments 
when they are wanted; but Scott is asking for so much that he 
can promise largely to pay when he wins, and you know I keep 
on high ground. All the members in the House from California 
are doing first rate except Piper, and he is a damned hog; any- 
way you can fix him. I wish you would write a letter to Lutrrell 
saying that I say he is doing first rate, and is very able, etc., 
and send me a copy. 

According to the congressional directories Aaron A. 
Sargent and Newton Booth were Senators from Cali- 
fornia. John P. Jones was a Senator from Nevada. 
Cornelius Cole had been a Senator from California 
in the Forty-third Congress. George C. Gorham was 
Secretary of the Senate. The name "George C. Gor- 
ham,*' appears in the Huntington accounts. George 
E. Spencer was a Senator from Alabama in the Forty- 
fifth Congress. Gilbert C. Walker was a Representa- 
tive from Virginia. William A. Piper was a Repre- 
sentative from California. He was of radical views. 
By this time it would seem that Luttrell had been con- 

New York, April 27, 1876. 

♦ ♦ ♦ Scott has'several parties here that I think do nothing 
else except write articles against the Central Pacific and its 

managers, then get them published in such papers as he can get 
to publish them at small cost, then sends the papers everywhere, 
and there is no doubt that he has done much to turn public 
sentiment against us. If it was known that the C. P. did not 
control the S. P. I think we could beat him all the time, although 


he has about the same advantag^es over us in Washington that 
we have over him in Sac. [Sacramento]. If he wants some com- 
mitteeman away he gets some fellow (his next friend) to ask 
him to take a ride to New York or anywhere else, of course on a 
free pass, and away they go together. Then Scott has always 
been very liberal in such matters. Scott got a large number of 
that drunken, worthless dog Pii>er's speeches printed and sent 
them broadcast over the country. He has flooded Texas with 
them. The Sac. Record-Union hurts us very much by abusing 
our best friends. There was a no. [number] of that paper came 
over some little time since that abused Conkling, Stewart and 
some other of our friends, with Bristow's name up for president. 
* * ♦ If I owned the paper I would control it or bum it. * ♦ * 

Roscoe Conkling was a Senator from New York. 
His name occurs in the Huntington accounts. Will- 
iam M. Stewart was a Senator from Nevada. Bristow 
was a prominent candidate for the Presidency ; at the 
time this letter was written, he was Secretary of the 
Treasury. The Sacramento Record-Union was at that 
time a railroad organ. 

New York, May 2, 1876. 
Herewith I send copy of telegraphic dispatch that came over 
yesterday. Who is this Webster? Is it not possible to control 
the agent of the Associated Press in San Francisco? The mat- 
ters that hurt the G. P. and S. P. most here are the dispatches 
that come from S. F. [San Francisco]. Scott has a wonderful 
power over the press^ which I suppose he has got by giving them 
free passes for many years over his roads, ♦ * » 

New York, May 12, 1876. 

♦ ♦ * I sent Hopkins an article yesterday cut from the 
Commercial Advertiser; today I met one of the editors, Norcutt; 
he told me Scott paid for having it published; that he would not 
have let it gone into the papers if it had been left to him, 
etc. ♦ ♦ * 

New York, June 7, 1876. 

♦ ♦ * I hope Luttrell will be sent back to Congress. It 
would be a misfortune if he were not. Wigginton has not always 


been right, but he is a good fellow and is growing every day. 
Page is always right, and it would be a misfortune to California 
not to have him in Congress. Piper is a damned hog and should 
not come back. It is shame enough for a great commercial city 
like S. P. to send a scavenger like him to Congress once. ♦ ♦ ♦ 

New York, June 12, 1876. 

♦ ♦ • I notice what you say of Wigginton, Luttrell and 
Piper. The latter should be defeated at almost any cost. 

Peter D. Wigginton, of Merced, and Horace F. Page, 
of Placerville, were Representatives from California 
in the Forty-fifth Congress. 

June 24, 1876. 
Parrott (Gorham) is, or was, writing a brief on fares and 
freight to influence, I was told, one of the judges of the Supreme 
Court. They are sure to do their worst but my better judgment 
tells me to take the scamps into camp. 

New York, March 7, 1877. 
^ * * I notice you are looking after the state railroad com- 
missioners. I think it is time. * * * I stayed on in Washing- 
ton two days to fix up R. R. Committee in the Senate. Scott was 
there working for the same thing, but I beat him for once, cer- 
tain, as the committee is just as we want it, which is a very 
important thing for us. ♦ ♦ * 

March 14, 1877. 

* * * After the Senate R. R. Committee was made up Scott 
went to Washington in a sx>edal train, and got one of our men 
off and one of his on, but they did not give him the com. Gordon 
of Georgia, was takeji off, and Bogy of Missouri, put on. 

John B. Gordon, of Atlanta, was a Senator from 
Georgia; Lewis V. Bogy, of St. Louis, was a Senator 
from Missouri in the Forty-fifth Congress. 

I gave today a letter to Senator Conover of Florida. He is a 
good fellow enough and our friend after he is convinced we are 

Simon P. Conover was a Senator from Florida in th§ 
Forty-fifth Congress. 


April 8, 1877. 
* * * We should be very careful to get a U. S. Senator 
from Gal. that will be disposed to use us fairly and then have 
the power to help us. Sargent, I think, will be friendly, and 
there is no man in the Senate that can push a measure farther 
than he. • ♦ ♦ 

Aaron A. Sargent was a Senator from Calif omia in 
the Forty-fifth Congress. 

New York, April 20, 1877. 

I wrote Crocker on the 12th inst., in relation to. Jones' Los 
Angeles road. A few days after I saw Jones I met Gould. He 
told me Eeene had bought it [meaning the railroad at Los 
Angeles owned by Senator Jones of Nevada]. Of course, I said 
I was glad to hear it, as we did not want the road at any price ; 
that I made Jones an offer for it because we wanted him to help 
us with our (C. P. and U. P.) sinking fund bill in Congress, 
and was very glad it [the railroad] had got out of the way, and 
that I saw nothing now to prevent friendly relations between 
Jones and ourselves, etc. 

On the Sunday following A. A. Selover came to nty house and 
said he came from Gould and Keene and that in the panic or 
break in Panama a few days before Jones wo^ld have broken if 
G. and K. had not come to help him out, and to do it they had 
to take Jones' railroad, etc., and he asked me, after some beat- 
ing about, if we wanted the road at $480,000. I told him that 
we did not want it at all but that we would take it so as to work 
in harmony with Jones, and that I had made him an offer as I 
wrote Crocker, and my impression was our people would do that 
now, but I was quite sure we would rather G. and E. would keep 
the road, if by that Jones could be made our friend, etc. What 
do you think of all this? I am rather disposed to think G. and 
K. have not bought the road but hold it as collateral. 

New York, May 7, 1877. 
♦ ♦ ♦ I notice what you say of Conover, the Florida Sena- 
tor. He is a clever fellow but don't go any money on him. 
♦ ♦ ♦ The $70,000 that I let Jones have are tied^p for ten 
years. I think we can make more than the interest on til^ 
amount paid for Jones' road out of our other roads by not 


tunning the Jones road at all; and Jones is very good-natured 
now and we need his help in Congress very much; and I have no 
doubt we shall have it. We must have friends in Congress from 
the West coast, as it is very important, I think, that we kill the 
open highway, and get a fair sinking fund bill by which we can 
get time beyond the maturity of the bonds that the government 
loaned us to pay the indebtedness; and I think if any Re- 
publican is elected in Sargent's place, he (Sargent) is worth to 
us, if he comes back as our friend, as much as any six new men, 
and he should be returned. 

New York, May 15, 1877. 

Yours of the 7th Inst, is received. I am glad you are paying 
some attention to General Taylor and Mr. Easson. Taylor can 
do us much good in the south. I think, by the way, he would 
like to get some position with us in Cal. Mr. Easson has always 
been our friend in Congress and as he is a very able man, has 

been able to do us much good and he has never ^ us one 

dollar. I think I have written you before about Senator Con-, 
over. He may want to borrow some money, but we are so short 
this summer I do not see how we can let him have any in Cal. 

I have just given Senator Ingalls, of Eansas, a letter to you. 
He is a good fellow and can do us much good. ♦ * * Senator 
Morton is coming over; also his brother-in-law, Burbank. They 
are good fellows, but B. means business, not here but in W. 

Scott is working everywhere for his open highway, but I 
think we can beat him; but it will cost money. 

The Congressional Directory gives the name of Oli- 
ver P. Morton as a Senator from Indiana. 

June 1, 1877. 
* * ♦ There has been quite a number of Senators and M. C. 
in the office here in the last few days ; they all say Scott is mak- 
ing his greatest effort on his Texas and Pacific (open highway) 

1 See Pacific Railroad Commission Report, p. 3851. In the original 
the word left blank here is said to look like "cost," Some authorities 
agreed to accept it as "lost/" which althougrh it seems to make no 
sense had doubtless a more dulcet sound in some ears. John A. 
E^asson, of Des Moines, was a Representative from Iowa and later 
United States Minister to Austria. John J. Ingalls, of Atchison, 
was a Senator from Kansas. 


and most of them think he will pass it; this man Hayes, most 
people say, is for it to conciliate the South; he may be, but I 
hardly believe he is; but I have no doubt he is for many things 
he should not be for. ♦ ♦ * 

' The reference is to President Hayes. 

New YoitK, September 10, 1877. 
Friend Colton: ♦ ♦ ♦ As to C;olonel Hyde writing a re- 
port about the harbor of San Diego. I would like such a report 
as he could write, and if he would write one to suit for $250 I 
would give it, and if he would not we shall have to go without 
it. * * ♦ 

(Letter of March 4, 1878, suggested that army offi- 
cers be let in on the Oakland water front job.) 

New York, October 5, 1877. 

Yours, No. 15, is received. I notice your remarks on our 
matter in CaL I have no doubt there is many things to annoy 
you. The dispatches about crossing the Colorado come over 
very well. I think Gould has had as much to do with stopping 
us on the bridge as Scott has, although I have had no reason for 
so thinking up to this morning (see clip from Tribune) f except 
Jim Wilson, of Iowa, is their man, and has much influence with 
McCrary. . 

Sec. of War was in Washington when the first order went 
out to stop work on the bridge, and Gould came in twice, and 
Dillon once, to tell me that the Sec. of the Interior had his war 
paint on and was to attack us in his message, etc., etc. I thought 
at the time they were trying to cover up something, and rather 
supposed it was to check us on S. P. ♦ ♦ ♦ 

George W. McCrary, of Iowa, was Secretary of War 
in the administration of Hayes. Carl Schurz was Sec- 
retary of the Interior in the same administration. The 
bridge was at a government reservation. McCrary 
and Schurz stopped it. James Wilson, of Traer, was 
a Representative from Iowa in the Forty-fourth Con- 
gress. According to "Who's Who" the home of James 


Wilson, who was Secretary of Agriculture in the ad- 
ministrations of Presidents McEinley, Roosevelt and 
Taft, was also at Traer, Tama County, Iowa, and he 
was in Congress from 1873 to 1877 and from 1883 to 

New York, October 20, 1877. 

♦ ♦ ♦ I think Safford had better be in Washington at the 
commencement of the regular session, to get Congress to con- 
firm the Acts of Arizona. 

I saw Axtell, Grovemor of New Mexico, and he said he 
thought if we would send to him such a. bill as we wanted to 
have passed into a law, he could get it passed with very little or 
no money; when if we sent a man there they would stick him for 
large amounts. ♦ ♦ ♦ 

October 30, 1877. 

♦ ♦ ♦ ♦ The committees are made up for the Forty-fifth 
Congress. I think the R. R. Com. is right, but the Com. on 
Territories I do not like. A different one was promised me. 
* * * I think there never was so many strikers in Washing- 
ton 1bief ore. 

November 9, 1877. 

♦ ♦ ♦ ♦ I do not think we can get any legislation this 
session for extension of land grants or for changing line of road 
unless we pay more for it than it is worth. ♦ * * Some 
parties are making greah effort to pass a bill through Congress 
that will compel the U. P. and C. P. to pay large sums into a 
sinking fund, and I have some fears that such a bill may pass. 
Jim Keene and others of Jay Gould's enemies are in it and will 
pay money to pass. 

New York, November 15, 1877. 

♦ - * * ♦ If we are not hurt this session it will be because 
we pay much money to prevent it, and you know how hard it is 
to get it to pay for such purposes. ♦ ♦ ♦ i think Congress 
will try very hard to pass some kind of bill to make us com-, 
mence paying on what we owe the government. * ♦ ♦ Every 
year the fight grows more anjj more expensive. ♦ ♦ ♦ 


New York, November 22, 1877. 

♦ ♦ ♦ Matters never looked worse in Washington than they 
do at this time. It seems as though all the strikers in the world 
were there. I send with this copy of one of their letters I re- 
ceived yesterday, all of the some tenor. The one I send is from 
ex-Senator Pomeroy. 

The inclosure is a letter of advice from t^omeroy 
to Huntington, outlining a scheme by which Congress 
could be controlled for the railroad, and closing with 
fulsome expressions. For Pomeroy, see Mark Twain's 
"Gilded Age f also Mr. Huntington's accounts for 
1876. Pomeroy had been a Senator from Kansas in 
the Forty-third Congress. 

November 24, 1877. 

♦ ♦ ♦ I notice what you write of the Santa Monica road. 
I ^m satisfied with that trade and when you write pay Jones no 
part of the $25,000, because there is an unsettled account of, 
say, $6,000, I think you forget his position. I have paid him 
the $25,000 as he told me he needed it very much. Jones can do 
us much good and says he will. 

December 6, 1877. 

♦ * ♦ I have just received telegram from Washington that 
Matthews and Windom have been put on Senate R. R. Com- 
mittee in place of Howe and Ferry. This looks as though the 
Texas and P. had control of the Senate as far as appointing 
coms. are concerned. I am not happy tpday. 

Stanley Matthews, of Cinciniiati, was a Senator 
from Ohio ; William Windom, of Winona, was a Sena- 
tor f roni Minnesota ; Timothy 0. Howe, of Green Bay, 
was a Senator from Wisconsin ; Thomas W. Ferry, of 
Grand Haven, was a Senator from Michigan. 

December 17, 1877. 

♦ ♦ * The Texas and P. Company have been fighting us for 
years, but have had but little money, but have used passes and 
promises largely; but the latter, as they say, is about played 
out, and some little time ago they joined teams, as I am told, 
with the North [ern] P[acific]. They had a little money to use 


as they had no mortgage or floating debt as I am told. They 
have made a little money on this end of their road and I think 
are using it. Jay Gould went to Washington about two weeks 
since and I know saw Mitchell, Senator from Oregon, since 
which time money has been used very freely in Washington and 
some parties have been hard at work at the T. &- P. — N. P., 
that never work except for ready cash and Senator Mitchell is 
not for us as he was, although he says he is, but I know he is 
not. Gould has large amounts of cash. and he pays it without 
stint to carry his iK>ints. ♦ • ♦ 

John H. Mitchell, of Portland, was a Senator from 

January 12, 1878. 

♦ * * Matters do not look well in Washington, but I think 
we shall not be much hurt, although the boys are very hungry 
and it will cost considerably to be saved. 

January 22, 1878. 

♦ • * The World again published today that the C. P. and 
S. P. [Central Pacific and Southern Pacific] owe fourteen 
millions floating debt, and it hurts us very much, and I don't see 
how we can carry our floating debt here unless this debt can in 
some way be transferred; that is the larger portion of it. The 
World is controlled by Tom Scott. A few months ago I could 
have had it in our interest, by paying its losses, or in other 
words, paying the bills that they [The WorM] could not pay, 
which would be from $2,000 to $5,000 a month. I did not think 
it wise to do it. * * ♦ 

February 23, 1878. 

♦ ♦ ♦ The Sub. Com. of the R. R. Com. of the House have 
agreed to report Scott's T. and P. Bills through to San Diego 
and I am disiK>sed to think the full Com. will report' it to the 
House. It can be stopped but I doubt whether it worth 
the cost. ♦ ♦ ♦ Scott no doubt will promise all the, say $40,- 
000,000, that the act would give him. ♦ ♦ ♦ 

New York, May 3, 1878. 

♦ • ♦ The Texas and Pacific folks are working hard on 
their biUi and say they are sure to pass it* but I do not believe 


it. They offered one M. G. one thousand dollars cash down, five 
thousand when the bill passed, and ten thousand of the bonds 
when they got them, if he would vote for the bill. 

New York, June 30, 1878. 
I think your letter to McFarland was good. • ♦ ♦ I think 
in all the world's history never before was such a wild set of 
demagogues honored with the name of Congress. We have been 
hurt some but some of the worst bills have been defeated, but 
we cannot stand many such Congresses. 

New York, September 30, 1878. 
* * * I think you are right about Field not sitting in the 
Gallatin suit. ♦ ♦ ♦ 

Albert Gallatin had been a member of the firm of 
Huntington & Hopkins at Sacramento. He brought 
suit to prevent the Central Pacific from setting aside 
its sinking fund. Justice Stephen J. Field was of the 
Supreme Court of the United States. For many years 
he was actively supported in some quarters for the 
Democratic nomination for the presidency. The Cali- 
fornia State Democratic convention of 1884, held at 
Stockton, considered charges against Justice Field 
based upon his decisions in cases wherein the South- 
ern Pacific Railroad was interested. As a result of 
these charges, the convention formally read Justice 
Field out of the Democratic party. 

In close connection with these letters should be read 
the table of Southern Pacific expenditures at Washing- 
ton that follows. These figures were revealed by the 
Pacific Railroad Commission when it secured posses- 
sion of the railroad company's books. They indicate 
sums spent without vouchers and charged only to "ex- 
penses." The "I. E. Gates" whose name appears so 
often among them was Mr. Huntington's private sec- 




X«ii. 13. R. Praachot....t 33.00 

Jin. 18. B. Franchot 13,200,00 

Mch. 11. C. P. Hunting- 
toil 1,000.00 

Hcfa. 15. R. PcsDchot... 1,000.00 
Mch. 23. C. P. Bunliaa- 

ton SOO.OO 

Apr. 26. C. P. Uuntiag- 

ton 500.00 

Uaj 11- C P. HimlinK- 

ton , 500.00 

Man 17. C P. HdDtine- 

t™ 1,000.00 

May 17. R. Franchol... 5,000.00 

jane 5. R. Franchot.... 5,000.00 
July 31. C P. Hunting. 

ton SOO.OO 

Aug. 24. C. F. HontinB- 

inBton 500.00 

Sept. 24, R. Franchot... 19,295.50 

Oct 2. I. E. Ga(M 5,000.00 

Not. 1. L E. Gatea 500.00 

Not. is. C. P. Himling- 

ton 1,000.00 

Not. 21. I. E. Gala SOO.OO 

No*. 29. I. E. Gates.... 4.000.00 

Dec. 28. I. E. Gate*.... 200.00 
. Dec. 31. "Servjcea In 

JBW" 13.233.33 

Total (72,461.83 


Jan. II. K. Franchot. ...t 500.00 

Ian. 16. I. B. Gates 200.00 

Mch. 14. Fitk & Hatch. 12,139.94 
May 14. C. P. Hunting. 

ton SOO.OO 

Jane 15. FSik & Hatdi. 1,910.00 
tone 22. C P. Hunting- 
Ion 20,000.00 

iune 27. K. Franchot 3.700.00 

uly 9, R. Franchot 150.00 

uly 10. I. E. Gatei 200.00 

aly 11. I. E. Gatea.... 200.00 
etit, 11. C. P. Hunting- 

Ocl. l«."'i.' E.'G'atea.'.'.'.' '28l!oO 
Oct. 23. I. E. Gates.... 200.00 

Not. Gen. Dwyer, U. S. 

ComDiiBsfoaer 1,000.00 

Dec. 2. "W. A. W." paid 

by C. P. Huntlnjiton... 4,8fi3.4S 
Dee. 29. C P. Hinting- 

ton 2.000.00 

Total t 52,844.42 


Jan. 4. N. T. Smith, (or 
. imoDnt uid H. Brown. t S,OO0.O0 
lui. 24. CTp. Hnnling. 
toa 2,S0D.OO 

Feb. 26. C. P, Hunting- 
ion 5,000.00 

Mch. 9. I. 2.000.00 

Mch. 12. : 1,125.35 

Mch, 24. 1 S0O.0O 

Mch. 29. ] 5,000.00 

Apr. 23. C 15,000.00 

May 9. C 300.00 

May 24. I 5,000.00 

Jane 2. C. 2,000.00 

June 4. C. 1,000.00 
June 30. I 

ton 5,000.00 

July 2. I. E. Gatei 200.00 

Sept. 5. C P. Hunting- 
ton 1.000.00 

Sept. 7. "Legal eipenies" 10,440.00 
Sept. IS. C. P. Hunting- 
ton 1,000.00 

Sept. 20. C. P. Hunting- 
ton 3,000.00 

Oct, 5. C P. Huntington 1,500,00 

Oct. 15. C, P, Hunltinglon 2,000,00 
Oct. 24. C P. Hunfing- 

ton 1,000,00 

Oct. 26, H. Hopkins, or- 
der S.000,00 

Not. 1. Letand Stanford S3.4IB.0S 

Nor. 9. I, E, Gates 5,000,00 

Not, 16. I, E. Galea 5.000,00 

Dec. 8. I, E. Gates 2.500.00 

Dec 18. I. E Gates..,. 5,000,00 

Dec. 19. I. E. Gales 1,000,00 

Dec, 26. C. P. Hunting- 
ton 2,000.00 

Dec. 28. Letand Stan- 
ford 52,500.00 

Totil (279,483.43 

1878. ^ 

Jan. 11. C. P, Huntington.! 1,150,00 

Tan. 2S. I. E, Gates 1.600,00 

Feb. 14. L. Stanford 1,000.00 

Feb, 20. C. P. Huniing- 

lon 2.500.00 

Mch. 18. C. P, Hunting- 
ton 5.500.00 

Mch. 19. C. P. Hunting- 
ton 4,500.00 

Apr, 12. I. E, Gales,... 1,750.00 

Apr. 18. I. E Gates 200.00 

M^y 4. James H. Storrs. 1,000.00 

May 20. I. E. Gales 5.000.00 

May 25. I. E. Gales,... 1.500,00 

May 27. I. E. Gales 5,000,00 

!une 7. L. Stanford.... 13,000.00 

une 22. I. E. Gales 2,000,00 

une 2S. 1. E. Gates.... SOO.OO 
une 28. L. Stanford,... 111,431.25 

une 29. Joseph H, Bell. 38,500.00 
une 29. C. F. Hunring- 

ton 99,167.» 



Mch. 31 


E. GatM.... 

Apr. 1. 


P. HuntltiB. 

A "" 6.' 


■ r' HiiitioB- 


■■Xltornej" f«. 
Anna Fianchot.. 

(ay 12. 


E. Gatn.... 

lay 15. 


E. Gatts.... 

lay l|. 


E. Gates.... 




E. Gat«j..,. 

w Vorknewi- 




Jaly m. 


lulj 26. 


July 12. 


Aug. IS 






Oct! s: 

Ocl. 14. 






. Gatei.... 

Oa. 2S. 


Oct. 26. 


; Gate'::;: 


E. Gates.... 

Legal eKp« 

.. D. D. Collon. 

Not. a. D. D. Colton. 
Nov, 13. I. E, Gales.. 
Ndv. 14. I. E. Gales.. 
Nov. IS. I. E. Gates.. 

Dec. 7. 


Aug. 2. A. J. Rowell.. 
Aug. 3. James A. Geoi 
Aug. IS. C. P. Hunlii 

?'■ J-?i.".l°jfi: 

s^t: i. a'j: Howeii;;. 

Sept. 3. J. A. George.. 
Sept. 4. T. M. Norwood 

Sept. 4. S, T. Gage 

SepL 14. I. E. Gates... 
Sept. 14. O. M. Bradfor. 
Sept. 23. D. D. Collon. 
Sept. 21. J. A. George. 
Sept. 27. 1. E. Gates... 
Sept. 27. f. G. Prenliss,. 
Sept. 2S. I. E. Gates 

Oct. S. I. 
Ocl. 7. 1 
Ocl. 7. J, 

Oct: 19: 

Oct. 22. 
Oct, 24, 


i. E:Gii«:::: 


, , A, George... 



teb. ": wSenffevd 

opment Company 

Feb. 19. I. E. GbIM... 

Total $447.63010 

All of which, more than $5,000,000, being money 
that was then due from the railroad company to the 
government and people of the United States, whose • 
representatives were thus induced to help the debtor 
company to avoid the payment of that debt. 



E. One Item in the BUI. 

"The railroads of today ought not to be judged by 
the past." 

So say the railroad attorneys, presidents, and cham- 
pions. So dutifully echoes that part of the press 
owned or controlled by the railroad Interests. 

No doubt all of us would be glad to accept and to 
follow the injunction if only we could; but to separate 
the railroad of today from its past is like separating 
the living tree from its root. 

The railroad company of today is an accretion of 
railroad companies of the past; the railroad manage- 
ment of today is an inheritance from the railroad man- 
agement of the past ; the railroad capitalization of to- 
day iias been built upon years of devious policy ; the 
railroad rates of today reflect fifty years of scheming 
and looting. 

If the railroad companies could become agencies of 
transportation and not of finance ; if they would cease 
to build new fictitious capital on the fictitious capital 
of previous years; if they could avoid as a basis of 
rates the necessity of getting interest and dividends 
on this fictitious capital, we could possibly afford to 
forget the past and its records. 

We must look back to the past because we are pay- 
ing for the past Daily the railroad past comes to us 


and collects its extortionate and unreasonable rev- 

The manner of this collection we shall now, if you 
please, proceed to see, and also to see how utterly fu- 
tile and absurd are, and must be, all attempts to deal 
with the American railroad (problem by doctoring 
symptoms with legal remedies, even when these are 
most justly grounded and ably enforced. 

You remember, no doubt, the $27,500,000 of subsidy 
bonds that the United States government issued and 
bestowed upon Messrs. Stanford, Huntington, Hop- 
kins, and Crocker, to facilitate the building of the 
Central Pacific. 

These bonds were to fall due thirty years after the 
completion of the road. 

The road was completed in 1869-70. The bonds be- 
came due in 1900. 

Originally, the government stipulated that the rail- 
road company should pay the semi-annual interest on 
these bonds, and the principal when due. 

The company refused to pay the semi-annual inter- 
est and got from the Supreme Court a decision that It 
need not pay this interest until it paid the principal. 
This obliged the United States to advance the semi- 
annual interest from the treasury, which amount was 
charged against the company. 

In 1887 the Pacific Railroad Commission Was ap- 
pointed to investigate the condition of the company 
and discover what use it had made of its resources and 
income, a reasonable inquiry in view of its repeated 
statements that it was too poor to pay the interest it 
owed, and would be too poor to pay the principal. 

After listening to much astounding testimony of a, 


nature extremely damaging to the company, the com- 
mission made two reports. The majority dealt lightly 
with the offenses that had been revealed. Governor 
Pattison, the minority member, returned a stinging in- 
dictment of Messrs. Stanford, Huntington, Hopkins, 
and Crocker, and urged the government to forfeit the 
company's charter for fraud and dishonesty. 

Nothing was done on eitjier report. 

In 1896, the time for payment being close at hand, 
the debt to the government was apparently more than 
$60,000,000, and the company's attorneys and repre- 
sentatives made no secret of its intention to default on 
this debt. 

Public sentiment demanded that some arrangement 
should be made. Mr. Huntington was still hovering 
about Congress with his agents and lobbyists. He pre- 
pared a bill that provided for the refunding of the 
debt into bonds bearing two per cent interest and pay- 
able at a period estimated at eighty years from date. 

This bill was slated for passage by the Republican 
machine to which Mr, Huntington had always contrib- 
uted liberally. 

Everybody knew that the bill was to be jammed 
through and Mr. Huntington was greatly pleased with 
the prospect. 

He had reason to be pleased. The bill settled all 
differences with the government, and put off the day 
of pasrment so far that it probably would never come. 

The reason for his confidence in the obedience of 
Congress to his desires might be surmised by any one 
that was familiar with his letters to "Friend Colton." 
But there was no need of surmise. The facts were 
plain enough. The Washington Correspondent of the 


Chicago Evening Post on April 22, 1896, telegraphed 
this to his journal : 

"The most pitiable and at the same time the most disgusting 
spectacle that now offends the national capital is the Hunting- 
ton lobby. The list of paid lobbyists and attorneys now num- 
bers twenty-eighty and their brazen attempts to influence Con- 
gress to pass the Pacific Railroad Refunding Bill have become 
the disgrace of the session/' 

Mr. Huntington's easy confidence in these measures 
and his satisfaction with the outlook were of short life. 
Presently they were upset by two men. 

At the request of Mr. William Randolph Hearst, Mr. 
Ambrose Bierce went to Washington, and every day 
for one year he wrote an article exposing the rotten 
features of Mr. Huntington's bill. 

These articles were extraordinary examples of in- 
vective and bitter sarcasm. They were addressed to 
the dishonest nature of the bill and to the real reasons 
why the machine had slated it for passage. When Mr. 
Bierce began his campaign, few persons imagined that 
the bill could be stopped. 

After a time the skill and steady persistence of the 
attack began to draw wide attention. With six months 
of incessant firing, Mr. Bierce had the railroad forces 
frightened and wavering; and before the end of the 
year, he had them whipped. The bill was withdrawn 
and killed, and in 1898 Congress adopted an, amend- 
ment to the general deficiency bill, providing for the 
collection of the Pacific Railroad subsidy debts, prin- 
cipal and interest. ' 

This may be held to be as wonderful a victory as_ 
was ever achieved by one man's pen, and, also, one of 
the most remarkable tributes to the power of persist- 


ent publicity. What it meant for California may be 
judged from the fact that when news was received of 
the death of Mr. Huntington's bill the governor pro- 
claimed a public holiday, and in the name of the state 
sent a telegram of thanks to Mr. Hearst. 

But it was a victory destined to have far more mem- 
orable results than these. At once the railroad com- 
pany abondoned all hope of cheating the government, 
and resorted to a vast and difficult feat of financiering 
that it might provide for the payment of the accumu- 
lated debt. For months the eyes of the financial world 
were fixed wonderingly upon this slack wire adventure, 
which was regarded in some quarters as^iraught with 
peril, in others as "a clever and ingenious contriv- 
ance," and on all sides as a new chapter in high finance. 

The substance of it was this: 

The amount due to the government, less deductions, 
was $58,800,000. For this the company gave twenty 
notes of equal amounts, payable semi-annually over a 
period of ten years, bearing interest at three per cent 
and secured by an equal amount of bonds. 

That is to say, of new bonds, issued by the company 
in addition to the bonds it was already carrying on the 
basis of rates charged to the public for passenger and 
freight transportation. In effect, therefore, new bur- 
dens for the public to bear. 

This is the point of the matter and will bear thought- 
ful study. 

The unpaid interest on the old government advance 
had accuniulated and amounted now to $30,700,000 — 
due to the government. Because, instead of paying it 
to the government as it became due the Big Four had 
wrongfully paid the money to themselves in the shape 


of dividends on the capital stock of the railroad, which 
they held. 

They now transformed this debt of $30,700,000 into 
another that we, the public, must support and pay. 

The new bonds were issued according to this beauti- 
ful device, and the capitalization of the company in- 
creased to that extent. 

There was next prepared a new issue of Southern 
Pacific stock and a new issue of four per cent collateral 
bonds. Next an assessment of $2 a share was ordered 
on the old Central Pacific conunon. 

But to offset this assessment, the new collateral 
bonds were presented free to holders of this stock to 
the amount of $16,819,000. 

Then these same stockholders of the old Central Pa- 
cific received, share for share, $67,275,500 of the new 
Southern Pacific stock on which six per cent dividends 
were to be paid — a fine, dividend-paying stock ex- 
changed for a stock that for years had been inert and 

Next a new Central Pacific Railway Company was 
organized in Utah to succeed the old, and the original 
part of the Millionaire Mill passed from public view 
forever. Yet only from public view. Screened behind 
these manoevers it continued to work and continues. 

The $16,819,000 of collateral bonds and the $67,275,- 
500 of new stock made $84,094,500 of securities which 
must be provided for from the earnings. Nominally, 
the total increase in the capitalization was $47,579,000, 
being the capitalized interest on the government debt, 
and the collateral bonds ; but the total paper capitaliza- 
tion was now $114,794,500, and all of it became inter- 


est or . dividend bearing, whereas much of it had previ- 
ously been of small value. 

A total of $114,794,500, on which interest must be 

We are paying it. 

Thus : 

Annual dividends on the stock, 6 per cent $4,036,530 

Collateral bonds, $16,819,000, at 4 per cent 672,760 

Capitalized interest on government subsidy 1,200,000 

Total annual charge on us $5,909,290 

So far (1922) we have been paying this twenty-two 
years. Our payments upon it have amounted to $129,- 

Then this is the way this particular account stands 
to date : 

Debt of the railroad to the government $58,800,000 

We have paid because of the refunding of that debt. 129,000,000 

We are out so far $70,200,000 

In eight more years, thirty years after the making 
of this deal, we shall have paid about $180,000,000, 
which is three times the amount of the debt. We shall 
then be losers to the amount of $120,000,000. 

it would have been enormously cheaper to give Mr. 
Huntington a cancellation of the debt. 

Cheaper in freight rates; cheaper, therefore, in the 
daily living expenses of the people. 

But since this debt and the annual charges that we 
must pay on it are directly and solely the results of 
the operations (before described) of Messrs. Stanford, 
Huntington, Hopkins, and Crocker, and of nothing 


else, kindly observe the impudence of the men that 
urge us to forget railroad history. 

We might very well answer that we will forget rail- 
road history when the railroads cease to make us pay 
for that history. 

But the floating of the gigantic refunding scheme 
had another result besides the levying of additional 
tribute upon us. Mr. Stanford was dead; Mr. Hopkins 
was dead, Mr. Crocker was dead. Mr. Huntington, 
who had been steering and directing the new opera- 
tions died (before they were completed) in August, 

Some confusion followed in the public mind, with 
many stories of sales, purchases, and reorganizations. 
When this mist cleared away, men saw that the Great 
Millionaire Mill had passed into a new ownership. 

For years the many properties of the original Big 
Four of Sacramento had been undergoing consolida- 
tion. For all the millions upon millions of fictitious 
stock issued and gathered to themselves as they had 
gone along, for ail the fictitious capitalization in all the 
long list of subsidiary lines and branches, being com- 
pany within' company until the human mind wearied 
and failed to follow the ramifications — ^for all this 
there had been issued stock in the Southern Pacific 
Company, of Kentucky, the final consolidated concern. 

Great blocks of this were now acquired from the 
heirs of the Big Four and through the exigencies of 
the refunding operations, and when the situation 
finally cleared there appeared as the real ownerrs of 
the old Central Pacific, \he Southern Pacific, the un- 
knowable convolutions thereof, the old Pacific Mail, the 
Morgan steamships, the Union Pacific, the whole be- 


wildering aggregation with all its load of fictitious 
capital, buttressed with lordly gifts from the public 
domain,' rich with spoils, incomparably the grandest 
source of riches ever kno'wn in human history — of the 
whole incalculable thing, the real owners appeared as 
the powerful Standard Oil interests, with the late 
E. H. Harriman as their representative. 

In the end it was the Standard Oil group that had 
financed the "clever and ingenious" refunding deal 
and had thereby seized the control of the Mill, and it 
is to the Standard Oil group that we pay our $5,900,- 
000 of annual tribute to that deal? and all the other 
tributes on all the other deals back to the days of the 
Contract and Finance Company, John Miller, and the 
books at the bottom of the river Seine. 

Is not that interesting? 

Yes, we should love to forget the past if the past 
would only let us. But when, on $200,000,000 of fic- 
titious stock created by the Contract and Finance Com- 
pany and its successors, we frunish such dividends 
that the price of that stock goes up to 137, the manner 
in which we are to win f orgetf ulness of the past ought 
to be very carefully explained to us. 

To what extent we have already furnished this and 
other tribute may be gathered from a table with which 
we may well conclude our reflections oirthis edifying 
subject. It does not show the total production of the 
Great Millionaire Mill ; probably no human mind could 
trace, formulate, and accurately state what that pro- 
duction has been. It shows only a part of the wealth 
that, without return of any kind, we have freely be- 
stowed upon this unparalleled institution. 



Government land grant, minimum $ 30»000,000 

Unearned dividends on stock 34y000»000 

Capitalized interest on subs.idy bonds 30,700,000 

Common stock (representing no investment) . 67,275,500 
Bonus on bonds 16,819,000 




Government land grant, minimum $ 40,000,060 

Donations by California councils 1,002,000 

Mission Bay, donated by the state, estimated 

value at the time 9,500,000 

Capital stock (representing no investment).. 160,000,000 

Dividends thereon 30,400,000 


Crovemment land grant acquired with Morgan 

purchase $ 13,000,000 

Surplus capitalized (see report 1903) 100,081,022 

Stock acquired under early leases 76,000,000 


Grand Total $608,777,522 

Of this sum only an inconsiderable fraction can be 
held to represent any kind of investment, and the 
greater part is to this day drawing interests and divi- 
dends from the consuming public. 

Reflected in the cost of living. 

Used as the basis of rates and for the adjustment 
of wages — a capitalization that has no foundation ex- 
cept on paper. 



This is the story of a pyramid. 

A pyramid is a beautiful thing. 

The lines are pleasing to the eye. They convey the 
ideas of symmetry and proportion. 

When a pyramid stands upon its base, as it ought 
always to stand, it conveys also the idea of strength as 
well as of a chaste and simple beauty. 

The pyramids of Egypt, for instance. For thirty 
centuries and more they have defied time and change. 
Each stands upon Jts base, with its apex in the air. 

But the pyramid of Cheops, in Egypt, now, standing 
on its apex with its base in the air — ^that would not 
suggest strength, nor beauty, nor proportion, woidd 
it? No, nor permanence, nor endurance, nor safety, 
nor wisdom in persons that camped under its shadow. 

The pyramid of Cheops in Egypt is a very large and 
famous pyramid. It stands upon its base. People 
travel from all parts of the world to see it. 

We have lately had in the United States a much 
larger pyramid than the pyramid of Cheops — very 
much larger. Also, much more wonder'f ul. 

But it did not stand upon its base. It stood upon its 
apex with its base in the air. 

Yes, that was one very strange fact about this won- 
derful pyramid. It stood with its great base in the 
air and its little head on the ground. There were many 
other pyramids in the United Sts^tes^ far more than in 


^^ypt. But this was the greatest of all and the most 
wonderful and the most astounding. 

Many years had been required to build this marvel- 
ous pyramid and the greatest skill had been used to 
keep it from toppling over. All the time it was rising 
higher and higher, and every year the prophets and 
wise men said, "Now the old thing will surely fall with 
a loud crash." But month after month it continued to 
stand up while people gazed upon it open mouthed and 
wondered if all the laws of nature had been upset and 
the days of the genii had returned. Until one fine 
morning there was a loud roar and — ^but we had bet- 
ter wait until we come to that. 

This pyramid of ours had properties of magic not 
possessed by any of the pyramids of Egypt. It made 
its builders rich and it helped to make other persons 
poor. All the time, day and night, it had that effect. 
Next, the builders did not really with their own fair 
hands build anything of stone or brick, and that was 
still more remarkable. They just made marks on a 
piece of paper and labor came and put the next course 
on the pyramid and we paid for it. 

Next, it was hollow, all hollow, however solid it 
might have looked at a distance, and the gentlemen 
that owned it used it like a gigantic hopper. All of 
us had to throw money into that hopper and it ran 
down to the bottom and there stood the gentlemen with 
sacks and barrels and took it away as fast as it accu- 

Wonderful pyramid ! Surely the history of it ought 
to be studied with careful attention by all of us who 
have thus to pay for it. 

The first stone in it was laid seventy-five years ago. 


when the Illinois legislature chartered the Rock Island 
& LaSalle Railroad Company, changed in 1851 to the 
Chicago & Rock Island. 

July 10, 1854, the line was completed from Chicago 
to the Mississippi river at Rock Island and at once be- 
gan to pay large, handsome dividends. 

About the same time some gentlemen were mapping 
a railroad across the state of Iowa from Davenport, 
which was opposite Rock Island, to Council Bluffs on 
the Missouri, 317 miles. Mapping much and building 
little. This enterprise was called the Mississippi & 

By July 1, 1856, they had built from Davenport to 
Iowa City, 54 miles, at a cost of $14,925 a mile, and the 
road was earning money at the rate of $5,500 a mile. 

But on May 25, 1856, Congress was induced to give 
to the young state of Iowa, "to aid the construction of 
railroads," 4,969,942 acres of the public domain (that 
is the land belonging to the people of the United 
States) and of this generous donation the gentlemen 
that were mapping and building the Mississippi & Mis- 
souri got a good slice. 

They induced the legislature to bestow upon them 
every alternate square mile of land in three miles on 
each side of their projected line. 

But 54 miles had already been built. Did they get 
aid for that? 

They certainly did. They got one-half of the land 
in a strip six miles wide from the Mississippi to the 
Missouri, the most fertile soil in America, and where 
land so bestowed happened to be occupied they got 
other and often better land "in lieu thereof" — a 
swindle of which we shall find other example^. 



To aid in the construction of a railroad, a part of 
which was already constructed. 

It didn't aid much. Let us look at this. When we 


go back now to any of these rotten chapters^ in our 
larcenous railroad historj' the custom is to defend the 
thefts of the public domain on the ground that they 
enabled us to have railroads. 

Not stopping to point out the significant fact that 
other new countries have had railroads built without 
looting the public domain, the simple truth is that 
there is not one needed railroad in the United States 
built with loot of this kind that would not have been 
built as soon without it. 

For instance, in this case the vast area of land 
grafted by these adventurers did not hasten the build- 
ing of this road but greatly retarded it. 

So soon as they got their land grant all construction 
stopped on the main line. 

Instead of proceeding with this work the company 
issued mortgage after mortgage upon its property and 
with the funds thus secured if built its southwestern 
branch through more populous and more profitable 
territory. Congress had given the land to encourage 
trans-continental building, to assist the problem of 
transit to the Pacific coast. The adventurers flouted 
this purpose and used the benevolence to build where 
they could collect the most tribute and get it most 

Tribute began early. Public land had generally 
been for settlement $1.25 an acre. To reimburse the 
public treasury for the grants to these adventurers 
the price of the remaining land to settlers was made 
$2.50 an acre, — ^thus neatly saddling upon the settlers 


the cost of the railroad and beginning a load that the 
producers have borne ever since. 

The company sold tnore than half a million acres of 
land thus obtained at an average of $8.68 an acre, 
which alone reaped a sum sufficient to build and equip 
the line two-thirds of the way across the state. Count- 
ing the money donated by counties and municipalities 
we may be sure that not one dollar of invested capital 
was required to build the road, but it was constructed 
and delivered to its owners as a free gift. 

These continued to mortgage the property thus be- 
stowed upon them by a benevolent people and to use 
the proceeds in building other lines. 

In 1866 the Gentlemen on the Inside for their own 
purposes announced a default upon these mortgages, 
shook out the small fry, and sold the property from 
themselves to themselves as the Chicago, Rock Island 
& l*acific Railroad Company of Iowa, which, they had 
organized and officered. 

The Chicago & Rock Island Company of Illinois had 
at th^t time a capital stock of $6,500,000. The same 
Interests controlled both. They issued $2,600,000 of 
new Chicago & Rock Island stock to stockholders at 
20 per cent of its par value, thus presenting themselves 
with $2,080,000 as a free gift. With the $520,000 of 
cash secured from this issue they consolidated the 
Chicago & Rock Island of Illinois and the Chicago, 
Rock Island & Pacific of Iowa. 

The first course had been laid on the pyramid. 

The next was added within a year when the capital 
stock was increased to $9,099,400. 

On this, substantial dividends were paid, year in and 
year out. 



About May 1, 1869, the next course was put in place 
by these fliaster builders, being an issue of $2,900,000 
of stock that was never paid for and constituted 
another free gift to themselves at our expense. 

Pyramid now $14,000,000. 

The road, with the public loot that I have described, 
was built through to Council Bluffs, where it connected 
with the Union Pacific. 

Another layer of stock issued the next year brought 
the pyramid to $16,000,000. 

Building went smoothly on under these skillful 
architects. Another layer of stock was issued in 1872 
for so-called construction purposes. 

Pyramid $22,000,000. 

All this time the road was paying large dividends, 
even upon fictitious stock issues, and was building 
branch lines by diverting its surplus earnings to that 
purpose. In other words, the Leasing Game, pre- 
viously described in these simple annals of the rich. 
In 1877 it went through the usual motions of acquir- 
ing its own property and absorbed the largest of these 
lines, the Chicago & Southwestern Railroad, which 
gave it a road to Atchison, Leavenworth and eventu- 
ally to Kansas City, gateway of the great southwestern 
traffic. It was now operating 1,003 miles of trackage. 

About this time it began to be confronted with a 
menace that in any other country than ours could 
never exist, and yet in our country was and often has 
been, and still is at times, serious to the management 
of prosperous railroad enterprises. 

It was making too much money. 

The dividends were 10 per cent. There was a large 
and steadily-mounting surplus. The directors did not 


dare to increase the size of the dividend ; and yet they 
wanted to lay hands upon that surplus ; and the over- 
whelming problem to them was how to get it and avoid 
the law and other consequences that might be painful. 

It was a troublous time in railroad history. The 
Grange movement had come to the West and had af- 
forded the pyramid builders a satisfying view of the 
day of judgment. The simple, unsophisticated farmer 
of the railroad exploiter's pleasant dreams had sud- 
denly become an awakened and highly-intelligent 
giant, convinced that he had had about enough. He 
had discovered that for all the agreeable feats in^ sud- 
den fortune making he was the goat. When stock was 
watered, he paid for it. When rates were sneaked up 
to support the watered stock, he paid for them. When 
his legislators and public officers were bribed to give 
things to the railroads, he paid for the bribing. When 
the railroads hired newspapers and writers to lie in 
their behalf, he paid the hire. And he was beginning 
to weary of a situation in which he toiled and sweated 
for the benefit of the Gentlemen on the Inside and got 
nothing for himself but mortgages he must pay. 

A great change was beginning in public opinion. 
For many years men that had manipulated certain 
railroad properties, and had, by all accounts, often 
cheated, lied, bribed, overawed, corrupted and ma- 
rauded in that pursuit, had been regarded by a part 
of the community with admiration as smart men and 
developers of the country and all that. At last sloppy 
adulation had begun to ebb. Many persons perceived 
the truth that these maraudings were at public expense 
and in no way smarter or more admirable than those 
of train robbers and stage bandits. 


The discovery had not been wholesome for financial 

This railroad, constructed at public expense, was 
piling up this annual surplus, and no one in the face 
of the state of public opinion at that time dared to 
suggest that the dividends be made greater than 10 
per cent. To increase them would surely bring down 
the wrath of the people from whom the money had 
been gouged. What, then, should be done? 

For a long time the problem plagued the directors, 
and meantime the surplus grew and grew. In 1878 
they canceled $4,020,000 of stock held as an asset in 
the company's treasury and appointed a special com- 
mittee to devise a way by which the rest of the surplus 
might be distributed without landing anybody in jail. 

The surplus was now $8,296,982, equal to almost 50 
per jeent on the outstanding capital stock, and repre- 
senting about as much money as had ever been put 
into the road. It was steadily increasing. True, it 
might be spent for needed improvements. The road 
badly needed double tracking; it had only dirt ballast 
and mostly wooden bridges. But if the surplus were 
devoted to any such purpose, how would that benefit 
the Gentlemen on the Inside? They might as well 
throw the surplus into the lake, for they would get 
none of it. Well, then what? 

In benighted New Zealand and other despicable 
countries that have not our blessings the problem 
would have been solved long before, because in such 
regions when the railroad income goes beyond 3 per 
cent on the actual investment the rates are reduced to 
the public. 

If the Chicago, Bock Island & Pacific had been in 


New Zealand it would by this time have reduced its 
rates more than two-thirds. Passenger rates, for in- 
stance, would have been one cent a mile instead of 

The Chicago, Rock Island & Pacific was not in New 
Zealand. It was in Illinois and Iowa. There are no 
pyramids in New Zealand. That is why it is so much 
inferior to our country and why we ought to despise it. 

Nevertheless, even in our country there are men 
that do not like to see a pyramid standing on its head. 
So for years they have been trying to prevent the 
building of such pyramids. They have passed laws 
against that kind of building; all kinds of laws sternly 
forbidding anyone to mix the mortar or get out the 
courses or lay the foundations, or in any way to plan 
for a pyramid that shall stand on its head. These men 
are still engaged in devising and passing such laws and 
dreaming strange dreams about them. The State of 
Illinois had a law of their devising. It forbade rail- 
roads to issue stock or scrip dividends, or, in other 
words, to cut melons. 

So now we can see how valuable such laws are and 
how wise the gentlemen that spend time in getting 
them passed and more-time dreaming about them. 

This was the way of it. In June, 1880, the pyramid 
builders formed a new company called the Chicago, 
Rock Island & Pacific Railway Company; not Rail- 
road, note, but Railway. 

They prepared for it $41,960,000 of stock, $50,000,- 
000 being authorized. Then they exchanged in their 
safes two shares of the new company, the Chicago, 
Rock Island & Pacific Railway for every share of the 


old company, the Chicago, Rock Island & Pacific Rail- 

Thus they laid upon the pyramid in one mighty 
monumental course $20,980,000 — all of fictitious or- 

It is only in building these pyramids that you can 
make something of nothing. 

At this time the company was operating 1,051 miles 
of line, only 48 miles more than in 1877. 

Its share capitalization (excluding the bonds, please 
note) was $20,917 a mile in 1877. In 1880, after these 
triumphs of finance,^it was $39,942 a mile. 

On the old capitalization the road had been paying 
10 per cent dividends. On the new capitalization it 
paid 5 per cent dividends. 

For one year only. Then they began to walk into 
that surplus. 

The very next year the dividends were made 7 per 
cent, equal to 14 per cent on the old capitalization and 
equal to 33 per cent on the actual investment. 

How poor by comparison seems the 3 per cent limit 
of New Zealand! 

With the dividends still at 7 per cent, $4,196,000 of 
new stock was issued in 1887 at par to the Gen- 
tlemen on the Inside. Market price, 120. A present 
to the Insiders of $839,200 and the same amount taken 
out of us. A small but neat specimen of the Melon 

To this device too little attention has been paid. If 
it is ever attacked it is defended as a piece of railroad 
business affecting no one but the beneficiaries. 

"It's none of the public^s concern'' is the invariable 


comment of the melon cutters when there has been a 
tendency to criticize this kind of horticulture. 

Is it none of the public's concern ? Let us see about 

A railroad directorate votes to issue $10,000,000 of 
new stock to the stockholders at 80 when the market 
price is 100, thus providing the stockholders with a 
melon of 20 per cent. No matter what the price there 
is added to the capitalization but $10,000,000, so what 
difference does the price make to us ? 

Merely this, that the treasury of the company misses 
$2,000,000 that it ought to have had, and the next time 
there is an issue of securities this deficit must be 
made up. 

The next time instead of an issue of $10,000,000, 
there will be one of $12,000,000. 

To meet this addition, of course, rates must be ad- 
justed accordingly. The more capitalization the 
higher the rates. 

An increase of one dollar in these rates has been 
estimated to mean an increase of four dollars when 
it reaches the final consumer, the public, you and me. 
We are told that such things are none of the public's 
concern. If that is true, then nothing is the public's 
concern, and its only function is to work, yield up the 
fruits of its toil and be silent. 

If we are unwilling to admit this idea, let us exam- 
ine further the history of this pyramid and see if we 
can how much it has cost us. 

1891. This year the company bought the Chicago, 
Kansas & Nebraska, one of its subsidiaries which it 
had bqilt out of itself. There was a nominal purchase 
of $25,222,000 in securities — an illustration of the 


Consolidation Device. The addition comprised 1,388 
miles of line. 

The control was also quietly securing with surplus 
revenues possession of the Burlington, Cedar Rapids 
& Northern, a north and south line by which the Chi- 
cago, Rock Island & Pacific obtained entrance to St. 
Paul and Minneapolis and the rich northwestern field. 

Following the panic of 1893 the dividend rate was 
cut to 2 per cent. In 1897 it was restored to 4 per 

These were not good years for pyramid building. 

But in July, 1898, work was resumed on the grand 
old structure and a fine new course was laid, being 
$3,844,000 of additional stock, issued and bestowed 
freely upon the existing stockholders. To make it up 
the company took $771,600 from the surplus and in 
the market bought stock to that amount and then gave 
it to the stockholders, the rest of the issue being new 
stock on which we have to this day the pleasure of pro- 
viding the dividends. 

Pyramid now $50,000,000. 

The excuse for this remarkable transaction was that 
from 1880 to 1885 the company had spent $8,213,000 
of earnings for construction, but it had promised its 
dear old mother or somebody that some time it would 
make restitution to the stockholders, who were con- 
veniently imagined to have beei^ wronged in some way 
by these expenditures, so it now restored about $3,- 
844,000 of the amount — ^which it had landed upon the 

Some persons think that the railroad business is not 
one that involves in its pursuit much imagination or 


sentiment. I cite the above pleasing incident in refu- 
tation of this idea. 

1901. The road was now earning net 10 per cent 
even on this inflated capitalization, which was equal 
to 22 per cent on the old capitalization and 33 per cent 
more on all the money ever paid in for the stock. 

The stock being worth 170 in the market, a new 
issue of $10,000,000 was made to the Insiders at par, 
thus presenting them with $7,000,000 and depriving 
the company's treasury of that amount. 

Pyramid now $60,000,000 in capital stock, to say 
nothing of the bonds. Possibly, as has been asserted 
by the unsympathetic, these pyramid builders, being 
of Wall Street, didn't know any more about a railroad 
as a public service or a railroad as a practical device 
to transport people and their goods than a landsman 
knows about a ship. As we manage things in our 
happy land they did not need J:o know. All they needed 
was skill in making a pyramid stand upon its head, 
and when you come to that accomplishment they were 
as good as the best. They were, in fact, merely the 
perfect exponents of the theory of the private owner- 
ship of public utilities ; they carried the theory to its 
legitimate and normal conclusion. All the practition- 
ers of that theory are engaged in building pyramids 
at the public expense. These were only better build- 
ers than many others. Some persons have found a lot 
of fault with their workmanship. Why not find fault 
with this style of ownership? That is the thing to 
object to if you do not happen to like pyramids that 
stand on their heads. Some persons wonder that our 
railroad system has broken down. In view of the style 
of ownership that we insist upon and its inevitable 


objects the only wonderful thing is that anybody 
should wonder. 

So the next thing the world knew of these matters, 
new architects had seized the ready trowel and were 
adding many courses to the great Rock Island 
Pyramid, wonder of the ages. 

They quickly showed that most other pyramid build- 
ers were children by cmparison and that pyramid 
building is the best business in the world. 

They had formed a syndicate in Wall Street and ac- 
quired enough of the stock of the Chicago, Rock Island 
& Pacific Railway to enable them to control and direct, 
on the financial side, the ostensible management. How 
much stock this really involved is not known and not 
material. Often for such control the stock that ac- 
tually changes hands is but a small amount and some- 
times it is nothing. Forgotten testimony before the 
Pujo committee showed the ease and simplicity of this 

The next turn out of the box the company issued 
$24,000,000 of collateral trust 4 per cent bonds and 
without expending a cent secured the St. Louis, Kansas 
City & Colorado, extending 100 miles west from St. 
Louis, and the Choctaw, Oklahoma & Gulf, an ex- 
tensive system with lines west from Memphis. 

Few things in this world, I may explain here, are 
more easily made than a collateral trust bond. A rail- 
road company issues much stock that it does not need 
and* maybe cannot sell. Then it takes a bundle of this 
stock and ties it together and issues against it a bond 
that has the stock for security or collateral. The thing 
sounds, of course, like a stock issue with another name, 
and to a certain extent is just that. But a collateral 



trust bond looks better than a stock issue, is more eas- 
ily sold and carries with it no share in the control of 
the property. 

In this instance, as in many others in our sweet 
railroad history, the collateral trust bond was used as 
means to secure valuable property without expense. 

That is to say, the management had begun at once 
to practice the surest and grandest of all formulas for 
the making of great wealth at public expense. Having 
secured control over one railroad they proceeded to 
issue securities upon it and with these purchased 
another railroad. 

Next year this was followed by the purchase of the 
Kansas City, Peoria & Chicago, with 142 miles of line. 

It now became evident that with the deft processes 
of the printing press and the inflated security great 
combinations had been planned. 

Fifteen million dollars of a new stock issue were 
added, and the Burlington, Cedar Rapids & Northern 
stock, which had been selling at 160, was exchanged 
share for share for Chicago, Bock Island & Pacific, 
selling at 170. 

Pyramid now $75,000,000. 

This deal was savagely attacked in the courts and 
did not go through without much difficulty. In the end 
the pyramid builders got away with it. 

These were rapid workmen. No day without its 
course added to the pyramid was their motto. They 
had hardly put the $15,000,000 of new stock in place 
when they caused the fact to be known that another 
Good Thing was at hand ; whereupon the price of the 
stock advanced $50 a share. 

On July 31, 1902, the new Good Thing materialized 



and proved to be, in fact, two Good Things — of a kind 
to astonish all beholders. 

On that day a concern called the Chicago, Rock 
Island & Pacific Railroad Company was organized as 
a holding company in Iowa, and a concern called the 
Rock Island Company was organized as a holding com- 
pany in New Jersey. "A holding company is a Good 
Thing," said the pyramid builders. "The only thing 
better than one holding company is two holding com- 

The holding company organized in Iowa was to hold 
the Chicago, Rock Island & Pacific Railway Company. 
The holding company organized in New Jersey was to 
hold the holding company organized in Iowa. 

This is literally true, however lunatic it may sound 
to persons uninitiated into the mysteries of high 
finance. Thus: 

The Chicago, Rock Island & Pacific Railway Com- 
pany, with a capital stock of $75,000,000 and a funded 
debt of $71,981,000, operated the railroad, 3,883 miles 
of line, gouged the receipts and kept the physical struc- 
ture from falling down. 

The Chicago, Rock Island & Pacific Railroad Com- 
pany, being the Iowa holding concern, with a capital 
stock of $145,000,000 and a funded debt of $93,500,- 
000, held the operating company, got the tribute and 
passed it along. 

The Rock Island Company, the New Jersey holding 
concern, with a capital stock outstanding of $150,000,- 
000 (common and preferred) held the Iowa holding 

The New Jersey holding company owned the entire 
outstanding stock of the next holding company. 


The next holding company own^d 95.04 per cent of 
the capital stock of the operating company. 

Holding company No. 2 (Iowa) issued 4 per cent 
collateral trust bonds, due in the year of grace 2002. 

Holding company No. 1 (New Jersey) issued com- 
mon and preferred stock. 

Every $100 share of stock in the old Chicago, Rock 
Island & Pacific Railway Company, the operating con- 
cern, was exchangeable for $100 of the collateral trust 
bonds of Holding Company No. 2, plus $100 of the 
common stock and plus $70 of the prefered stock of 
Holding Company No. 1. 

That is to say, $270 for $100. 

Thus with one stroke there was added to the capi- 
talization of this enterprise the largest amount of 
water ever involved in any one transaction in the his- 
tory of American finance. 

The result was of the greatest importance to us that 
must pay the interest and dividends upon all this ficti- 
tious capital, thus so enormously increased, but there 
were other results that to the merry pyramid builders 
were of even greater moment. 

First, they were enabled to exchange all their origi- 
nal stock holdings into bonds, if they so wished. This 
left them with their fortunes secure no matter what 
might happen. Second, they had now decreed to them- 
selves without paying a cent thereafter still larger 
holdings of stock than they had previously had ; $270 
for every $100. 

The remarkable feat of securing absolute and pro- 
longed control of a property like this without risking 
a dollar in it was achieved by an ingenious little clause 
in the organization of Holding Company No. 1, by 


which holders of preferred stock had the right, ex- 
clusive of the holders of common stock, to choose the 

The taking of the profits was arranged for in other 
little clauses by which the operating company earned 
from the public the money to pay the 4 per cent inter- 
est on the collateral bonds of Holding Company No. 2 
and all in excess of this interest went to Holding Com- 
pany No. 2 as dividends upon the stock of that com- 
pany. These dividends were then paid to Holding 
Company No. 1, which used them (when it got them) 
to pay the dividends on its own common and preferred 

If the operating company made a great deal of 
money from the public these arrangements insured its 
safe and quiet delivery to the Gentlemen on the Inside. 

If the operating company, heavily loaded with so 
many charges, made from the public no more than 
enough to pay the interest on the bonds, that interest 
was still secure for the same Gentlemen. 
. Heads I win ; tails you lose. 

This being cinched, i;hey now proceeded to a gamble 
which was a truly marvelous conception, particularly 
in view of the fact that the things gambled in were the 
highways of the people. At one time the scheme em- 
braced the consolidation (without expense) of the Chi- 
cago, Rock Island & Pacific with the great St. Louis & 
San Francisco system, the Houston & Texas Central, 
the Houston & West Texas, and Houston & Shreve- 
port. The St. Louis & San Francisco alone comprised 
more than 5,000 miles of line; the combination would 
have been the greatest in the world. The plan in re- 
gard to the Tej^as roads, after progressing to a point 


where it was anounced as completed, fell through, but 
the St. Louis & San Francisco was absorbed without 
paying a cent for it. Five per cent collateral trust 
bonds of the Iowa holding company, the Chicago, Rock 
Island & Pacific Railroad Company, were exchanged 
for 90 per cent of the $29,000,000 outstanding common 
stock of the St. Louis & San Francisco, and the two 
systems began to be operated together. 

The essence of this arrangement was that the public 
was to pay for the purchased property and give it to 
the Gentlemen of the Pyramid. 

At this time tonnage was heavy on both systems ; the 
outlook was joyous. 

After the deal came a period of comparatively 
lighter business. The gamble went wrong. Complaint 
was made that financial architects were operating the 
combined systems tpo much for the benefit of the pyra- 
mid and not enough for the physical welfare of the 

On December 1, 1909, after the combination had 
lasted about six years, this part of the pjoramid fell in. 
The pyramiders sold to a syndicate headed by B. F. 
Yoakum the St. Louis & San Francisco stock they held, 
and immediately called in the 5 per cent collateral trust 

This operation was done at a loss, and to cover it 
the Iowa holding company issued $7,500,000 of new 5 
per cent bonds, which again were water. 

Under these shocks the pyramid visibly tottered. At 
last there came a day when the abnormal thing could 
no longer defy nature and stand upon its head. All 
the money poured into its hoppers did not provide 
enough to pay the interest upon one of its many bond 


issues. A receiver was appointed and the huge thing 
fell to earth with a loud and painful sound. 

Then it was discovered that the builders had nimbly 
skipped aside before it collapsed and the losses would 
fall upon others. 

Meantime, this once magnificent property, the nat^ 
ural highway of a great population, had been squeezed 
and drained to wring from it the heavy charges that 
these operations imposed. 

As to which, I cite some facts extremely pertinent 
to you if you have household expenses to meet. 

In 1903, when these exploits were but beginning, 
the bonded indebtedness of the road wa^ $21,543 a 
mile; by 1911 it had reached $32,146 a mile. 

This is the way the annual interest charges soared : 

1905 $7,096,096 

1906 7,748,170 

1907 8,279,300 

1908 8,413,222 

1909 8,861,173 

1910 9,129,785 

1911 9,741,853 

How do these interest charges come about? 

Well, here is plainly enough the way some o:^ them 
come about. Here are four years' performances in 
issuing equipment trust notes for new equipment that 
ought to have been paid for from earnings and couldn't 
be because the earnings were swept away by this enor- 
mous capitalization: 

1907 Equipment trust notes, 4% p.c. $3,900,000 

1907 " •* "6 p.c. Series B 240,000 

1909 " " " 4% p.c. Series C 4,505,000 

1910 " " " 4% p.c. Series D 6,300,000 

1911 « ♦' " 5 p.c. Series E 100,000 

The aogK island system 169 

Ostensibly, these were all short-time notes. But in 
the report for 1911 it appeared that a considerable 
part of these charges were being made permanent by 
issuing, in lieu of the equipment trust notes as fast 
as they came due, long-term bonds for "additions and 
betterments, including equipment." 

On all these devices again we must pay the interest 
charges. And yet the railroad thus bedeviled and all 
but swamped was normally one of the most profitable 
in the world. 

Once more, poor New Zealand ! In that inferior 
country they have a rule that all additions, improve- 
ments and new equipments must be paid for out of 
earnings and not made an occasion for bond issues 
nor interest charges. How little they know in New 
Zealand ! On the above equipment notes we have the 
pleasure of paying about $600,000 a year interest, 
taken right out of our wages and salaries in the shape 
of living expenses. 

Previous to the rescue of the St. Louis & San Fran- 
cisco from this hysterical enterprise rumors were 
abroad that something unusually good was to be ex- 
pected in the preferred stock of the Rock Island Com- 
pany. The year before the price of this stock had 
sagged to 21. It now rose to 94, at which price great 
quantities of it were unloaded. After which it fell to 
54. The rumors proved to be mere dreams of the pipe 

Who it was that unloaded may be guessed from 
what was revealed when the receivership came. 

Here is a^ chronological account of the water in this 
colossal thing: 




1866 — ^Water in old C. R. I. & P. R. R % 2,080,000 





Rock Island Co 124,868,625 

\ bonds 7,500,000 



ii « 



new " 



ti u 



u u 



" Rock Isla 


■^ « 

" C. R. I. & 

Total ; $307,172,625 

Less duplication in the" above $124,868,625 

Net water 182,304,000 

This disregarding the land grant and other items 
that, strictly speaking, should be included in the 

Meantime there have been issued to the Insiders the 
following luscious melons : 

1869^01d C. R. I. & p. R. R. Co. 

1870— " " 

1878— " " 

1887— New C. R. I. & P. R. R. Co. 

1898— " 

1908— " " 

.$ 400,000 

. 4,020,000 

. 7,000,000 

Total $13,146,800 

The whole huge pyramid of ultimate capitalization 
r^ed upon the earning power of the operating com- 
pany, the thing that runs the trains and keeps the 
bridges from falling down, the only thing that means 
aught to the public, the only thing that has any rela- 
tion to a transportation service. That is to say, it 
rests upon the operation of the Chicago, Rock Island 
& Pacific Railway Company. 

The outstanding capital stock of this company was 


It will be seen from the foregoing table that in this 
capital stock there was $31,804,000 of water. 

Deducting this, we have as the total cash paid stock 
in the concern the sum of $43,973,200. And the net 
income in 1911 was $19,431,790, or 44 per cent upon 
the actual investment. 

This is the basis upon which this sky-scraping 
pyramid stood — on its head. 

Was not this a fearful and wonderful thing? 



Physical Perils of OvercapitaMzation. 

On the 31st of December, 1912, Mr. Daniel Willard, 
President of the Cincinnati, Hamilton & Dajrton Rail- 
road, five other officers and ten directors of the com- 
pany were indicted at Indianapolis, Indiana, charged 
with manslaughter. 

Manslaughter! Has an ugly, menacing, terrifying 
sound, hasn't it? Suggests prison cells, and great, 
clanging locks, and things still worse. And these were 
all eminent gentlemen of the utmost respectability, 
too; some conspicuous in the highest walks of high 
finance and at least one a reformer with name famil- 
iar in the mellow trump of fame. And now indicted 
for manslaughter! 

After Mr. Willard came these his fellows included 
with him in this awesome charge : 

George F. Randolph, Vice-President of the Road. 

George M. Schriver, Second Vice-President 

W. G. Loree, General Manager. 

H. B. Voorhees, General Superintendent. 

R. B. White, Division Superintendent. 

George W. Perkins, Eminent Reformer and Apostle 
of Regulation's Artful Aid, Director of the Road. 

F. D. Underwood, Director. 

Norman B. Ream, Director. 

L. F. Loree, Director. 


H. P. Davison, Director. 

F. W. Stevens, Director. 

Joseph Wood, Director. 

E, R. Bacon, Director. 

Harry Bronner, Director. 

O. G. Murray, Director. 

All these, with two of their obscure and Jiowly em- 
ployes, charged with the grave crime of manslaughter ! 
How could gentlemen of such distinction be mixed up 
in an3rthing like that ? 

Why, on November 13, 1912, there had been another 
wreck on the Cincinnati, Hamilton & Dasrton. It was 
not much of a wreck for that road, nor seemingly for 
that road entitled to stand out from a long and dismal 
record of such things. But in this case certain public 
officers in Indiana thought it time the Cincinnati, 
Hamilton & Dayton should begin to observe the laws 
of the State ; also that it should begin to run its trains 
on rails instead of in the ditch. Whereupon the in- 

The accident occurred within the city limits of In- 
dianapolis and resulted from a complication of rail- 
road diseases. 

An overloaded and underpowered freight engine 
was trying to pull eastbound freight No. 95 from In- 
dianapolis to Hamilton, Ohio. It stalled on a one per 
cent grade. The splitting of the train to get it up this 
formidable obstacle threw it off its schedule. It was 
due to meet fast passenger train No. 36 at Julietta, 
six miles away. The engineer saw he could not make 
Julietta in time and pulled into a siding to let the fast 
passenger go by. The road is single tracked, there 
were no automatic block signals, the switch lamp was 


not burning, the crew of No. 95 was composed of new 
and inexperienced men, the switch was not properly 
closed, the passenger was behind time and running at 
excessive speed. It dashed into the open switch and 
struck the standing freight train. All the passenger 
cars were of wooden construction and ground up like 

Fifteen persons were killed; eleven were injured. 

Here, obviously, was manslaughter, or the like. 

About those absent block signals, for instance. The 
Indiana State Railroad commission had ordered them 
to be installed upon every railroad in the state and 
finally had named as the utmost limit January 1, 1912, 
beyond which no railroad must be without this equip- 
ment. Twelve months had passed and the Cincinnati, 
Hamilton & Dayton still had failed to comply with this 

Commissioners, grand jurymen, citizens were 
highly indignant when this fact was disclosed. What 
are laws for? 

"The Commission believes,'' said its chairman, "that 
in order to prevent such fatalities where officers or 
men of these companies, including their directors, 
carelessly or negligently do or omit to do an act from 
which the death of passenger or employe results they 
should be prosecuted and convicted. 

**We think not only the man who forgets, but the 
officer who employs an incompetent man and the di- 
rector who diverts to other purposes the revenue that 
should be appropriated to securing good meit, to in- 
stalling safety devices and the like should be held 
criminally afccountable." 



If you are a lawrbreaking director or officer I guess 
that will hold you for a while. 

Chief Inspector Belnap of the Interstate Commerce 
Commission came along promptly, made a careful in- 
vestigation and diagnosed some things that to trav- 
elers and railroad workers were of grave significance. 

Tr6in No. 95, the freight, consisted of an engine, 
twenty-six loaded cars, four empty cars and caboose. 
It stalled upon a one per cent grade. The Chief In- 
spector's report says : 

"The records of the company show that trains fre- 
quently were compelled to double into Irvington, the 
first station reached after leaving the terminal. On 
sixteen occasions during the sixty days preceding this 
accident trains had doubled into Irvington, and engine 
No. 426, which was hauling this train, had doubled 
into this passing track seven times out of this total of 
sixteen and on only one trip did it have a full tonnage 
rating" [i. e., in the load it was pulling] . 

"On the date of the accident it had ninety-nine tons 
less than the full tonnage rating. 

Evidence was also introduced showing that the 
coal was poor and that regardless of the fact that the 
reports on engine No. 426 showed it to be in good 
steaming condition, the engine was unable to handle 
the train." 

"The investigation disclosed the fact that on this 
railroad switch lamps are frequently found not burn- 
ing. The chief train dispatcher stated that each night 
on this division four or five switch lamps are reported 
not burning. This seems to indicate either that the 
lamps do not receive proper attention or that they are 





The Cincinnati, Hair/ilton & Dayton Railroad — 
physical and financial derelict. 

Why? It was an old, established enterprise, it con- 
nected populous centers, it traversed a rich, busy, 
thriving, productive region, it had an enormous traf- 
fic. Why derelict? For years and years it had been 
one pf the safest, best-equi pped, most solid, most prof- 
itable railroads in the United States. 

When the population of the region it threaded was 
about one-third as great as the present population^ it 
earned ten per cent dividends and maintained its 
physical condition at par. What happened to it? 

Take a look at its story, for here you have in tabloid 
form the whole thing. 

It was organized in 1846 and began to be operated 
in 1851, about sixty miles long, directly connecting 
Cincinnati and Dayton. The next thirteen years pro- 
duced these results : 

Year Capital Stock 

1852 $1,463,325 

1853 1,694,000 

1854 2,158,900 

1855 , .... 2,155,800 

1856 2,155,800 

1857 2,155,800 

1858 2,155,800 

1859 2,155,800 

1860 2,155,800 

1861 2,155,800 

1862 ^.... 2,155,800 

1863 -. 2,399,500 

1864 3,000,000 

In these years it had paid about eighty per cent in 
cash and twenty per cent in stock dividends. Origi- 

Dividends Paid Thereon 



















• . 



• • 



















nally it had been devoted, in a quaint, old-fashioned, 
fannerlike way, to the secondary object of the Amer- 
ican railroad system, which is the transportation of 
freight and passengers. Then it began to perk up and 
realize the pleasant horticultural things that could be 
brought to table by pursuit of the primary object, 
which is attained through the job printer and the pen 
and consists of issuing securities. 

In these thirteen years it had increased its stock 
$1,536,675, which was more than half of its capitaliza- 
tion and was paying ten per cent on water and all. 

1869. This year on the illusive prospect of a lease 
to the old Atlantic & Great Western it hoisted its cap- 
ital stock $500,000. 

The same year it declared a cash dividend of six 
per cent and a scrip dividend of five per cent, payable 
in bonds, which were a burden laid upon the future 
operating revenues. 

Six per cent dividends were the rule until it struck 
the long, lean season that followed the great panic of 
1873. Whereupon, in common with other roads, this 
enterprise passed up the dividends. In 1880 it re- 
sumed them at 3i/^ per cent, in 1881 4 per cent and in 
1882 came back to the good old 6 per cent solid as a 

Meantime the operations and mileage of the road 
had been much extended by various means, but chiefly- 
by a device, very familiar In American railroad his- 
tory, the Interlocking Lease. 

The true purpose of this device, as we have found 
in the many samples of it we have examined, is to 
conceal earnings and to make them appear very small 
when in reality they are very large. 


This trick was now worked repeatedly in the case 
of the Cincinnati, Hamilton & Dayton and added sim- 
ultaneously to its mileage and the welfare of the gen- 
tlemen that on the Inside of things were getting rich 
at public expense. 

In spite of such operations, which are always, by 
the way, regarded as legitimate, and in spite of the 
watering of its stock, its financial history was for an 
American road, a fairly (jlean slate. It was rec- 
ognized as a solid old institution and a great money 
earner. As such it began to attract the attention of 
eminent financiers that on all sides of it were building 
fortunes by the use of the job press, the ready pen, 
and the inflated security. In the eyes of such, a 
money-earning railroad not already loaded to the limit 
with water, is as the delectable mountains. 

In 1882 these devised a promising scheme to con- 
solidate the Cincinnati, Hamilton & Dajrton on the 
good old leasing basis with the Cleveland, Columbus, 
Cincinnati & Indianapolis. The courts Imoeked this 

The next year a deal was fixed up in the highest 
style of the horticultural art by which the Cincinnati, 
Hamilton & Dayton issued $1,000,000 of preferred 
stock, and was next to be turned over to the Erie. In 
exchange for Cincinnati, Hamilton & Dayton stock 
thus watered, the poor eld Erie was to issue and guar- 
antee six per cent certificates. 

Every consolidation scheme brings down a stock 
freshet and every stock freshet produces new melons, 
which mean a new burden of charges on the operating 

In this instance again the courts interfered with th^ 


scheme. They do sometimes. About once in ten thou- 

There now appeared upon this attractive field one 
of the ablest of all the masters we have ever known 
of the pleasant art of making melons grow and ripen 
on nothing but water. This, it will be admitted, is 
saying much, but not too much if you know the records 
of our American horticulture. For about five years 
previous to September, 1887, th^ financial circles were 
dazed with the exploits and the world's imagination 
was fired with the fame of Henry S. Ives, known from 
ocean to ocean as "the/young Napoleon of finance.'* It 
was this mighty genius that now turned his attention 
to Cincinnati, Hamilton & Dayton, with results that 
in some quarters occasioned consternation. 

Perhaps we ought to pause here to consider the 
achievements and career of this young man, since he 
should have more than one abiding interest for us. 

He had begun life in a New York broker's office, 
where he had assimilated much of the idea of glorious 
American oportunity that so earnestly we hold out to 
our young men. He gathered that the correct purpose 
in life was to become rich, and having spread before 
him the financial biographies of so many Americans 
that had become rich, he made a careful study of the 
ways they had pursued. When he had seized their 
secret he went forth and applied it with liberal hand, 
and in a short time was a financial hero of unprece- 
dented magnitude. 

"The young Napoleon of Finance." At times he 
seemed more than a Napoleon; he seemed a youthful 
prodigy and wizard, at whose touch all things turned 
to gold — or melons ; same thing. Success after success 


crowned him with laurels of the desirable long green ; 
the astounded community marveled over so many tri- 
umphs of skill and daring; How did he do these 
things ? 

He had laid hold of the very arcanum of success. He 
had mastered the function of the job press, the ready 
pen and the bogus security, as the true tools of scien- 
tific horticulture, melons and wealth. 

Casting his eagle eye over the list of American rail- 
roads for one not already in a state of wreckage from 
the exercise of these useful implements, he fell upon 
this Cincinnati, Hamilton & Dayton compact, profit- 
able, with a capital stock only two-thirds water and 
capable of yielding almost anjrthing to a skilled appli- 
cation of the job press, the ready pen and the advanced 
principles of fortune-making. 

Late in 1885, he went quietly to work and his firm, 
the once famous Henry S. Ives & Company, secured 
control of a majority of Cincinnati, Hamilton & Day- 
ton stock. On June 15, 1 886, he had himself elected a 
director and George-H. Stayner, a member of his firm, 
chosen to be president of the railroad. To this was no 
opposition — ^at the meeting. He controlled the major- 
ity of the stock. 

On September 16, 1880, he called at his office in New 
York a meeting of stockholders, consisting, appar- 
ently, of himself and Stayner, and brought in from the 
garden a bit of juicy fruit that would delight the eyes 
of any expert in melon growing. . 

It was an issue of $10,000,000 of preferred stock, 
which brought the capital to $14,500,000. 

On February 8, 1887, this was hoisted again with an 
issue of $500,000 of common stock. The common was 


then paying eight per cent dividends, and the road had. 
been earning a neat surplus. 

The $10,000,00a of preferred stock was issued 
through Henry S. Ives & Company, who proceeded to 
hypothecate it and play other tricks with it, after the 
most approved methods of financial wizardry. Among 
the things they had in view was a plan to hitch the 
Cincinnati, Hamilton & Dajrton to the Baltimore & 
Ohio, a proposal which, as it would introduce the 
Leasing Game on a large scale, was looked upon with 
much enthusiasm in the best circles. 

On September 10, 1887, Young Napoleon met with 
a Waterloo that finished him. He had been applying 
not wisely but too well the principles of railroad for- 
tune making. The resources of the job press and the 
fountain pen were overworked and exhausted, and the 
firm of Henry S. Ives & Company blew up with a loud 

Among the institutions Young Napoleon had man- 
aged to wreck was the Cincinnati, Hamilton & Day- 
ton. No return for the $10,000,000 of preferred stock 
created at the touch of his magic wand had ever 
reached the company's treasury except "a credit with 
Ives & Company of $12,000,000 subject to check on 
demand" ; but this proved to be no merchantable con- 
sideration, since the cash assets of Ives & Company, 
when the firm exploded, were about $1,000. 

A committee of such stockholders and directors as 
had been outside of Napoleon's camp journeyed down 
to New York to view the ruins, which were pictur- 
esque. They found $5,249,000 of the preferred stock 
where they could lay hands upon it, and promptly can- 
celled it, declaring the issue to be fraudulent and void. 


They went back to Ohio and induced the courts there 
to cancel $2,000,000 more, but the rest was out, having 
been pledged by Napoleon. So late as March, 1890, 
$2,406,900 of this stock was in the hands of innocent 
purchasers, who formed a syndicate to protect their 
interests and take up the securities pledged by Ives. 
For the next two or three years some expert bookkeep- 
ing was required to take care of this account, the item 
being carried in the balance sheet among the assets 
(apparently for a humorous purpose) and accom- 
panied by the single but apropriate word "suspense." 

Physically the road never recovered from the blow 
of these operations. Yet, strange to say, it contlnuea 
to be manipulated by the financiers, who added still 
farther to the great load it was bearing. For the next 
two years no dividends were paid on the common 
stock and strict economy and a reduction of wages fol- 

But on May 9, 1892, the common stock was increased 
from $4,000,000 to $8,000,000, and after a time divi- 
dends were squeezed from the property on all this 
overcapitalization. Four per cent on the preferred 
and five per cent on the common. 

July 8, 1895, the Cincinnati, Hamilton & Dayton, 
Cincinnati, DsLyton & Ironton and Cincinnati, Dayton 
& Chicago were merged, the occasion being made jubi- 
lee, as usual, by plenty of high water. Eight mil- 
lions of new common stock was authorized, also a new 
preferred stock bearing five per cent, for which the 
holders of the old four per cent preferred stock were 
privileged to exchange their holdings. Each share of 
Cincinnati, Hamilton & Dasrton common (old) .re- 
ceived 155 in new preferred and 200 in new common. 



or $355 in stock for each $100 — altogether one of the 
choicest melons ever gathered, and a beauty bright. 

Holders of stock in the other roads exchanged on 
the basis of one for four. 

These amazing operations brought oi^t $14,712,000 
of new stock, $6,975,000 of preferred and the rest 

In all these years the process of absorbing outlying 
roads and loading the operating revenue with addi- 
tional interest charges was zealously pushed. 

In 1901 the cal)ital stock was $16,000,000, and the 
company was operating 652 miles of road. 

June 18, 1904, came out the authorized statement 
that the Cincinnati, Hamilton & Dajrton had been 
bought by the Interests that owned the Pere Mar- 
quette. Common stock of the Pere Marquette (unpro- 
ductive of dividends) to the amount of $11,000,000 
was transferred to the Cincinnati, Hamilton & Day- 
ton, which thereupon issued $5,500,000 more of com- 
mon stock of its own. This brought the common stock 
to $13,500,000 and with the preferred stock lifted the 
share capitalization to $20,425,500. 

In 1905 the Leasing Game was played between these 
two roads in its most offensive form. From the first 
the deal had been of an extremely flagrant nature. The 
Cincinnati, Hamilton & Dayton now leased the Pere 
Marquette (both having the same control), undertak- 
ing to pay four per cent on $10,512,200 Pere Mar- 
quette preferred and five per cent on $14,140,000 Pere 
Marquette comixion. The essence of this cold-drawn 
arrangement was that the Cincinnati, Hamilton & 
Dayton, a road with a great business and a rich ter- 
ritory, was saddled with a huge, unprofitable enter- 


prise. The Pere Marquette had paid in five years smaU 
dividends on its preferred and three dividends at the 
rate of 4 per cent on its common. But, as will appear 
elsewhere, these dividends had not really been earned, 
and the paying of them caused a railroad scandal. 

In addition to all this monstrous burden now placed 
upon it, the capital stock of the Cincinnati, Hamilton 
& Dayton on its own account had been watered to the 
following proportions : 

Old preferred, including what was stUl left of 

Napoleon's work % 1,024,500 

New 5 per cent, preferred • 6,925,500 

Total preferred $ 8,000,000 

Common stock 13,500,000 

Total $21,500,000 

The same year J. P. Morgan & Company came into 
the game and took over the holdings (about $6,000,- 
000 of preferred) that had been secured by a syndi- 
cate of brokers when the first Pere Marquette deal 
was put through. 

The next news the financial world )iad of this stock 
it had been dumped upon the Erie (in which Mr. 
Morgan was also influential) at $160 a share, the poor 
old Erie to issue a new line of bonds to take it up. If 
you know aught of the load of securities under which 
Erie is staggering along you will think this incredible ; 
yet it is the sober truth. One of Mr. Morgan's part- 
ners was director in Erie, and other Erie directors 
were put upon the board of the Cincinnati, Hamilton 
& Da3rton. 

But when the active administration of Erie got a 


good look at things from tlie inside it declared the deal 
^ff , and Mr. Morgan was compelled to take back his 
Cincinnati, Hamilton & Dayton stock. 

Whereupon the road went into the hands of a re- 
ceiver, Mr. Morgan choosing Hon. Judson Harmon, 
who was Mr. Morgan's preference for the Democratic 
nomination for president in 1912. The derelict had 
been loaded to a point where it was waterlogged. 

Next the abominable Pere Marquette lease was 
knocked out or broke down or something. 

Then in 1909 a deal v/as patched up with the Balti- 
more & Ohio, which agreed to buy at the end of seven 
years and at a price to be fixed by arl^itration, the 
stock that J. P. Morgan & Company still held, and 
meantime to operate the road and to guarantee the 
interest and principal of $11,307,000 of four per cent 
refunding bonds. This meant more interest charges to 
be dragged out of operation. 

On August 19, 1909, the receiver turned the prop- 
erty back to the corporation, and the next day came 
another reorganization, the flood gates were again 
thrown open, and out poured a new refunding mort- 
gage of $12,500,000, a general mortgage of $20,000,- 
000, and purchase money collateral trust gold notes to 
the extent of $11,557,000 — ^by which latter the road 
was in effect to purchase itself and deliver itself to, 
the Baltimore & Ohio. These ^notes the Baltimore & 
Ohio guaranteed. 

This added $44,057,000 to the already extravagant 
capitalization, except that the new securities retired . 
all but $248,575 of the preferred stocks, about $7,- 

In 1911 the 110,000 shares of Pere Marquette stock, 


par value $11,000,000, Ihat all this time had been re- 
posing in the treasury of the Cincinnati, Hamilton & 
Dayton, were turned over to J. P. Morgan & Company 
— and charged to profit and loss. 


1904 $28,295,000 

1905 63,532,000 

1906 63,944,000 

1907 70,493,000 

1908 70,607,000 

1909 56,423,675 

1910 68,181,675 

1911 70,998,865 

1912 99,086,880 

It was now operating 1,014 miles of line. 

At the close of its last fiscal year, June 30, 1912, the 
report of the poor old Cincinnati, Hamilton & Dayton 
wreck showed this remarkable condition : 

Permanent capital assets, such as cpst of road and 
equipment, leaseholds, stocks owned, securities 
in treasury and other investments $78,888,092 

Permanent capital liabilities, including its own 
capital stock, capital stock of leased lines, and a 
bonded indebtedness of $90,838,285 102,800,080 

The road was to the bad by 24,111,968 

In other words, it was bankrupt, insolvent and bro- 
ken, having been made so by the job printing press, 
the fountain pen and the other adjuncts of the ready 
fortune maker. 

Meanwhile the total earnings had increased from 
$8,008,918 In 1905 to $9,570,282 in 1911. 

But under the weight of all this water the expendi- 
tures for maintenance of way and structures had been 
reduced from $903,936 in 1905 to $834,462 in 1911. 


That tells the story. No wonder the trains rocked 
off the tracks. 

It was to extract from this broken-down and de- 
crepit thing the interest charges loaded upon it by 
financial horticulture that Mr. Willard, Mr. Randolph, 
Mr. Vorhees and the rest were hired. 

The operating revenues were insufficient to yield 
the amount required and to maintain at the same time 
the physical condition of the road. 

The choice presented, and the only choice, was 
whether they should do the work they were hired to 
do and squeeze out the interest charges, letting the 
physical condition take care of itself ; or whether they 
should neglect the work they were hired to do, main- 
tain the physical condition and let the interest charges 

If they chose to maintain the physical condition they 
would fail in the purpose of their employment and 
promptly lose it. Other men would be put in their 
places that would do the required work. 

Choice ! There was no choice. They must get those 
interest charges or get out. 

The next turn of the wheel they are indicted for 

However, let us not be disturbed about that. I 
hardly have need to say that they never went to jail 
or suffered other inconvenience on that account. I 
don't know why they should. The real offenders were 
the men that made a physical and financial wreck of 
this, one of the best railroad properties in the world. 

It was for them that Train No. 36 was wrecked and 
its passengers and trainmen killed. 



The True Uses of Melons. 

When the state legislatures, in the early days of 
railroad history in this country, began to be wary 
about granting public funds to further the new style 
of highway, gentlemen with railroad projects in their 
teeming brains turned to the public domain. 

What discouraged the legislatures, as we have seen, 
was the fact that gentlemen that received these grants 
always looked upon the new public highway as their 
private possession and the money lent to them as gifts 
won by their own superior merits. This was not at 
all the original idea when railroads were introduced, 
but it was adopted with enthusiasm by the railroad 

The public domain consisted of the land in the new 
states and territories of the west that had been ac- 
quired from the Indians or otherwise and had not yet 
been settled. The disposal of it lay in the hands of 
Congress, where the notion seems to have prevailed 
either that it was inexhaustible and could' be given 
away forever, or that it was elastic and could be 

By use of the argument that the new regions in the 
west would never be developed until they were pierced 
with railroads, that railroads would not be built with- 
out grants of the public lands and by still more power- 


f ul appeals of the kind indicated by Mr. Huntington's 
correspondence, Congress was persuaded to be ex- 
tremely generous with the people's landed possessions. 
So generous, in fact, ihat in a few years the people 
awoke to find that they had no such possessions left 
to them, railroad companies, real and imaginary, hav- 
ing taken an area equal to nine States. It became lit- 
erally the fact that any combination of men, using the 
necessary arguments, could get great slices of the 
public land on the mere assertion that they intended 
to build a railroad; provided they called it a trans- 
continental project and gave it a good transcontinental 
name. The name was important. Something that 
ended in "Pacific" was the best. A prospectus and a 
name that contained this magic wprd were the only 
visible things necessary; the things invisible seem 
sometimes to have been quite different and much less 
lawful. _ 

In 1857 one of the projects that claimed the large, 
prehensile ear of Congress answered all the require- 
ments as to name, certainly. It was called the Minne- 
sota & Pacific, and seems to have had a map and every- 
thing — except a railroad. On March 3 of that year- 
Congress passed a blanket measure giving away great 
areas of public lands to aid in the building of rail- 
roads in what was then the Territory of Minnesota. 
Nineteen days later the Minnesota legislature char- 
tered the Minnesota & Pacific Railroad Company, 
which by virtue of this act of Congress immediately 
became possessed of one-half of the land in a strip ten 
miles on each side of the line it had drawn on its hand- 
gome map. For every mile of line so represented on 


that map it was presented with ten square miles of 
fertile land — out of the people's domain. 

In return for this generosity, the company built ten 
miles of track, from St. Paul to what was then the 
town of St. Anthony Falls and is now Minneapolis, 
and there it stopped. 

Five years later the Minnesota & Pacific was reor- 
ganized as the St. Paul & Pacific. In American rail- 
road history, "Reorganization" almost always means 
increase of capitalization, for the benefit of the re- 
organizers. It was so here. The St. Paul & Pacific 
issued much new stock and many new bonds. It does 
not appear that the stock was paid for. The bonds 
were sold in Europe, chiefly in Holland. The money 
thus obtained was. used to build some of the lines pro- 
jected on the handsome map. But the land bestowed 
upon the projectors by the generous Congress would 
have been more than enough to pay for the building 
of these lines. The projectors, therefore, were in this 
same pleasant situation we have found others of their 
kind to enjoy, that without expending any of their 
own money the railroad was being built and the land 
grant fell in upon them as so much bonus or velvet. 
To say npthing of the stock. 

That this is exactly true may be seen in a moment 
from a simple calculation. For every mile of line they 
received from the government 6,400 acres of land in 
the public domain. Estimating this land at the value 
of $2.50 an acre, the land grant amounted to $16,000 
a mile. The cost of construction was less than $10,000 

a mile. 

The stock was of little market value, except per- 
haps as wall paper, but carried with it the control of 


the property. Stockholders could vote; bondholders 
coidd not. 

This had come to be the common method of organ- 
izing a railroad company. One set of men furnished 
the money and another had the control. 

In 1864 the Legislature of Minnesota, at the insti- 
gation of the men that had the control, divided this 
company by creating from it a new corporation that 
bore the remarkable title of the First Division of the 
St. Paul & Pacific Railroad Company. It had the same 
oflBcers as the parent company but otherwise was for 
a time a thing of mystery. A railroad that has ar- 
rived at the dignity of a First Division must have a 
great deal of trackage to divide, but this railroad had 
very little. In the end legal proceedings disposed of 
the mystery. The First Division of the St. Paul & 
Pacific, having the same officers and stockholders as 
the rest of the concern, was really a construction com- 
pany. It did the building, received the money there- 
for and saved to the projectors or inside stockholders 
all the profits that otherwise would have gone to con- 
tractors. That is to say, the money for the construc- 
tion came from the bondholders in Holland but was 
spent by the control in America, and under the judi- 
cious arrangement the control spent the money upon 
itself. As it made the contracts with itself there was 
naturally no check upon the expenditures, some of 
which seem to have been of liberal nature. 

Bonds had been issued and sold to the Hollanders 
in five successive installments as the progress of the 
work demanded. Early in 1872 the Hollanders seem 
to have become suspicious that all was not going well 
with the building, for they refu^jed to buy any more 


of the bonds and the work stopped. Up to this time 
the interest on the bonds as they matured seems to 
have been paid out of the proceeds of the sale of fresh 
bonds. When the market for fresh bonds slumped 
off the payment of interest ceased also. A New York 
firm, John S. Kennedy & Company, the head of which 
came afterward to play a peculiar and not edifying 
part in this story, was trustee for some of the bonds. 
It brought suit to secure payment and in August, 1873, 
the United States Court appointed Jesse P. Farley, an 
experienced railroad man of Dubuque, Iowa, to be re- 
ceiver of the property. 

He found it in a state of picturesque wreckage. 
Much of the construction had been so badly done that 
the line could not be operated. There was but little 
equipment; most of that in use was rented from an- 
other railroad. 

Meantime the original projectors had stepped from 
under by the handy means of selling their stock. 

This, I may remark in passing, is also usual in such 

Mr. Farley was a practical genius in railroad oper- 
ation. He straightened out the line so that trains 
could be run, slashed expenses, boomed business, be- 
gan to accumulate a surplus, used it to improve the 
property and made the thing go. 

In 1877 while he was still receiver, the Minnesota 
legislature passed an act providing that if the road 
were not completed to a certain point within a certain 
time it should forfeit that part of its land grant that 
was within the state's control. The distance to be 
built was 112 miles. Farley secured from the court 


authority to build this extension and to issue receiv- 
er's debentures to pay the cost thereof. 

The court limited the cost to $10,000 a mile, includ- 
ing station buildings, grounds and equipment. 

Farley put the line through and had it in operation 
within the specified time and expended only $9,500 
a mile. Some miles he built for $8,225 each. 

For the building of similar line in the old days the 
First Division of the St. Paul & Pacific Railroad (con- 
struction company as before noted) had charged the. 
St. Paul & Pacific Railroad (same stockholders) $30,- 
000 a mile. 

This may throw a flood of light on the smash, the 
suit, the receivership and all the rest of the story. 

Mr. James J. Hill had been for many years a resi- 
dent of St. Paul, first as a clerk for a steamboat line 
and then as local freight agent for the St. Paul & 
Pacific. At the time of Mr. Farley's coming, Mr. Hill 
was an inconspicuous dealer in butter and eggs. He 
became well acquainted with the receiver and often 
discussed with him the progress of the rebuilding of 
the St. Paul & Pacific^ in which he had a natural inter- 
est, for he had spent six years in its employ. 

Mr. Farley testified afterward that in the summer 
of 1876 Mr. Hill came to him with a si^gestion that 
it would be well to secure at cheap prices the bonds of 
the Dutch bondholders, foreclose on the defaulted in- 
terest, obtain possession of the company and reorgan- 
ize it. He bdieved that this would be a profitable 
venture, or, as he himself called it, a "good specula- 

Mr. Farley thought so, too. But he said it would 
be necessairy to get the money to buy out the 0utch 



bondholders and neither he nor Mr. Hill had any 
means. Mr. Hill said he thought he knew where he 
could get the money. 

Afterward Mr. Hill returned and announced that 
he had brought into the enterprise Commodore Nor- 
man Wolford Kittson, a St. Paul man formerly en- 
gaged in steamboating, George Stephen, manager of 
the Bank of Montreal, and Donald A. Smith, a former 
fur trader and adventurer in the wilds of the North- 
west. These men were Canadians: Mr. Hill was a 
Canadian. None of them had any money, but Mr. 
Stephen, as manager of the Bank of Montreal, was in 
touch with moneyed men. So, to a less degree, was 
Mr. Smith, and these were to secure what funds should 
be needed. Mr. Farley understood that he was a full 
partner in the enterprise. 

Mr. HilFs idea was to send an agent to Holland, 
quietly buy up the bonds and then appear in fore- 
closure proceedings. Mr. Farley, who as receiver 
knew the location of every bond, said that enough 
could be secured without sending to Hollands 

Soon afterwal^ th^ Dutch bondholders sent an 
agent to St. Paul to investigate the condition of the 
property. He came straight to Receiver Farley, who 
introduced him to Mr. Hill and Mr. Kittson. With 
these he had many conferences about the road and its 
state and prospects. In the end he accepted an ar- 
rangement with them by which they were to buy bonds 
on these terms : 

For the $1,200,000 Branch Line issue of June 2, 
1862, seventy-five per cent of par value. 

For the $3,000,000 Main Line issue of March 1, 
1864, thirty per cent of par value. 


For the $2,800,000 Branch Line issue of October 1, 
1865, twenty-eight per cent of par value. 

For the $6,000,000 Main Line issue of July 1, 1868, 
thirty-five per cent of par value. 

For the $15,000,000 Extension issue of April 1, 
1871, thirteen and three-fourths per cent of par value. 

All unpaid coupons to be included in the sales. 

What induced the representative of >ihe unfortunate 
Hollanders to believe that these were fair prices can 
only be surmised. As a matter of fact all of these 
bonds were worth, or should have been worth, par or 
near it. They were first mortages on more than 500 
miles of operated and paying railroad that owned 2,- 
586,000 acres of fertile land. On a modest computa- 
tion, the land alone was worth much more than the 
face of the mortgage. 

However the deal might have been made, it went 
through. Mr. Stephen stood by with enough money to 
secure of these bonds what were needed for the next 
act in the "friendly move." The St. Paul, Minneapo- 
lis & Manitoba Railroad Company was organized with 
Mr. Stephen as president, Kittson and Smith directors 
''and James J. Hill as general manager, these being 
also the stockholders. Capital stock, $15,000,000 — 
not one cent paid in. Foreclosure proceedings were 
brought, the court ordered the property to be sold to 
satisfy the judgment on the defaulted Donds, and on 
June 14, 1879, the Master in Chancery sold all of the 
property of the two St. Paul & Pacific Railroad Com- 
panies to the St. Paul, Minneapolis & Manitoba for $3,- 
600,000. ' 

Of this a small percentage, it was decreed, was to 



be in cash. The rest was receiver's debentures, and 
the bonds. 

Subsequently the receiver swore that the property 
thus sold for $3,600,000 was worth at that time more 
than $15,000,000. Still later the fact was developed 
that the new purchaser sold part of the land grant that 
it acquired with the railroad thus cheaply for $13,- 

The first thing the new St. Paul, Minneapolis & 
Manitoba Railroad Company did was to issue $8,000,- 
000 of new bonds upon the property it had secured — 
conclusive evidence, if any were needed, of the bad 
judgment or deficient knowledge of the Dutch bond- 
holders. With the proceeds of these new bonds Mr. 
Hill and his associates paid back to Mr. Stephen's 
friends (chiefly the Bank of Montreal) whatever funds 
had been advanced to secure the bonds in Holland and 
cleared off all other expenses involved, which were 

■ The $15,000,000 of stock the four Canadians had 
issued they divided among themselves without paying 
for it. Mr. Hill, Mr. Kittson and Mr. Smith took each 
one-fifth. Mr. Stephen took two-fifths, one of which 
he was supposed to hold in trust for another person. 
The identity of this other person he never disclosed. 
Mr. Farley, the receiver, averred that there was no 
mystery about it for the fifth share belonged to him. 
From the beginning, he said, it had been agreed that 
he was in on the deal, share and share alike. When 
he had demanded what he said was his rightful one- 
fifth and had been refused it, he brought a suit against 
his four former associates in which the facts here re- 


lated and many other allegations much more unpleas- 
ant were set forth. 

This istrange suit, which you will find fully reported 
as No. 287 in the October term of the Supreme Otourt 
of the United States, .1893, dragged on for thirteen 
years, being twice fought from St. Paul to Washing- 
ton and back. You might think it of a nature to cause 
a national scandal, in view of the position of the re- 
ceiver and the significance of his allegations. If he 
told the truth the romantic gentlemen from Canada 
were put in a light still worse and highly inconsistent 
with the true spirit of any other romance than that 
of the card-sharp. For even the most desperate devo- 
tee of railroad romanticism will hardly go so far as to 
admire a greasy, sinister and utterly illegal bargain 
with an officer of a court and a bargain that was not 
kept. This, of course, is the conclusion suggested by 
Mr. Farley's allegations. Perhaps those allegations 
were unfounded. Thirteen years of litigation failed to 
produce any definite judicial decision on this point, 
but it brought forth other things of almost equal value 
to those that believe in great fortunes "honestly ac- 

When the case was tried in- the lower court, Mr. 
Farley took the stand and told an extraordinary and 
detailed narrative of the many conferences at which 
(he said) the plan to secure the road had been dis- 
cussed, including his own share therein. He said that 
he was, in fact, absolutely necessary to the enterprise, 
because as receiver he "had knowledge not possessed 
by the others as to the whereabouts and situation of 
the bonds, their rated value by the holdel^s, the mode 
whereby they could be reached and procured, the sit- 


uation, amount, character, and value of the lines of 
railroad and other property, and in respect to the 
pending foreclosure suits." He quoted Kittson as in- 
sisting upon Farley's participation and remsing other- 
wise to join the brotherhood. 

"I know nothing about a railroad and don't care to 
know," Kittson was alleged to have said. "Jim Hill 
knows nothing about the management of a railroad, 
and it would be folly for men to go into an enterprise 
of this kind even if they were successful, without some 
person with them with railroad ability and experience 
to manage the property." 

On this, according to Farley's testimony, he agreed 
to join the enterprise if Kittson could /get the money 
required. Kittson, Farley testified, undertook to get 
the money from his Canadian connections, and an 
agreement was made that Farley should have share 
and share alike with the others. On June 3, 1876, 
Farley wrote to John S. Barnes of New York, a mem- 
ber of the firm of John S. Kennedy & Co., with which 
he regularly coresponded, that "he (Kittson) can get 
the money," and on August 23rd, same year, he wrote : 

"'His friend, who is expected to furnish the money, 
has unlimited control of Canadian politics. It might 
become a Canada project, but that would be a matter 
of no moment to you or me if we could make some 

Here are bits of alleged conversation at the confer- 
ences taken from the testimony in the case : 

Kittson — ^I won't have anything to do with it, unless 
you [Farley] are interested. We don't know anything 
about railroads. 

Farley — I have no money, Mr. Kjttspn, 


Kittson — ^We don't want you to furnish any money. 

Hill — Certainly not. 

Kittson — ^We will furnish the money. 

On another occasion: 

Farley — If you cannot get the Litchfield stock [in 
the old company], why, you will have to step 'into the 
Dutch shoes, take the place of the Dutch bondholders, 
and go ahead and foreclose — organize a new company, 
put on all the securities the property will bear, use 
enough of the securities to pay back the bonds cost, 
and the balance is profit en the thing. 

Which, as we have seen, is exactly what was done. 

On another occasion, according to the testimony, 
Farley's position as receiver was discussed. 

Kittson — ^We will have to keep this thing to our- 

Hill — Certainly; it won't do to let anybody know 
anything about it. 

Farley [to Fisher, his assistant, who participated 
in many of the conferences] — Now, Mr. Fisher, we 
will have to keep this thing perfectly quiet. 

One of Farley's letters taken from the record of the 
case, may serve to lighten these matters with a pasi?- 
ing ray of grim humor.. It was written after the sale 
of the property and read thus : 

''Since the election of Bigelow and Galusha as directors in 
the New ■ .Company, men of no Money, railroad experience or 
Influence, And myself left out in the cold, I am forced to the 
conclusion that My time and claims on the St. Paul & Pacific 
is Short. I did expect better thingns of Hill and Kittson. I 
had a talk with Jim Hill last knight. He disclaims any in- 
tention on his part to ignore my claim. But he is such a Lyer 
can't believe him. It is a matter of astonishment to every 
Person in St. Paul^ to see the wa^ Jim handles Mr. Stephens. 



* ^ * You must not blame me if I should try to get even 
with Jim Hill before I leave here." 

Mr. Farley's story was supported on the witness 
stand by Mr. Fisher, who, at the time he testified, was 
president of the St. Paul & Duluth Railroad. Mr. Kitt- 
son had died before the ease came to trial, but Mr. 
Hill, in his testimony, denied emphatically that there 
had been an agreement with Farley, and that Farley 
had been in any way a partner in the enterprise. In 
this he was supported by depositions from Stephen, 
Smith and others. Certain letters that it was said 
Farley had written to John S. Kennedy in New York, 
letters that, according to his lawyers, would help ma- 
terially to establish his ease, he was not able jto put in 
evidence because, as was asserted at the trial, Mr. 
Kennedy went to Switzerland when the suit was be- 
gun and remained there out of the court's jurisdiction, 
refusing to furnish the letters or copies thereof. Mr. 
Kennedy died not long ago, leaving a great fortune, 
much of which was bequeathed to charity, causing 
many enthusiastic panegyrics. In the list of his pos- 
sessions, published at that time, appeared quantities 
of securities in what are known as the Hill properties. 
His name occurs frequently through this narrative; 
through his firm, for example, the first foreclosure 
suit was begun which resulted in the receivership. 

The decision of the Supreme Court left these issues 
undecided. Justice Shiras wrote the decision, which 
was based solely upon Farley's failure to produce any 
documentary evidence of the agreement he asserted. 
If Mr. Kennedy had remained in this country perhaps 
Mr. Justice Shiras's views on this subject might have 
been different. 


The four Canadians were thus left in undisturbed 
possession of the property. Whoever the fifth person 
may have been for whom Mr. Stephen held a share in 
trust, he figured no more in this story and his share 
was divided with the rest. Perhaps he was a dream 
person, or one too modest to make himself known and 
too hostile to money to take his part in this great 
Good Thing. 

For Good Thing it was, beyond most records in 
human affairs — ^f or those that got the profits of it. A 
few months before and these four men were practically 
without means or the prospect of fortune. Now, with- 
out the expenditure of a dollar of their own, without 
risk, without effort, without labor, without calculating 
any market or supplying any need of mankind, they 
had come into possession of $15,000,000 worth of rail- 
road stock, and more than $13,000,000 worth of land 
formerly in the public domain, 2,580,606 acres of it. 

Even this, bewildering as it seems, was not the ex- 
tent of their good fortune. They had issued $8,000,- 
000 of bonds with which to repay Mr. Stephen's 
friends. When they had done so and met all other 
expenses and bought up some odds and ends of junk 
railroad not included in the Dutch deal, they had left 
$3,620,000 of these bonds, worth in the market 104. 

Total, made out of nothing with nothing, more than 

Compared with this the man that got up the story 
of Aladdin and his Wonderful Lamp was a piker. 
There is nothing in the fairy tales more astonishing. 

By 1882 the $15,000,000 of stock, issued for nothing, 
was receiving 7 per cent dividends and on the market 
was quoted at 140. 


Since 1876 the Northwestern country had been fill- 
ing rapidly. As it developed, the St Paul, Minneapo- 
lis & Manitoba Railroad issued additional bonds, ex- 
tended its lines, reaped additional harvests of busi- 
ness and piled up the profits. 

The management now began to furnish additional 
and convincing evidence of how far we had allowed 
ourselves to drift from the ancient principle of the 

It was taking from the enterprise every year far 
more than a reasonable compensation for the service 
it rendered in operating this highway. Instead of re- 
turning this surplus to the public to which it belonged, 
the management proceeded to add the surplus to the 
capital and then to demand (and obtain) returns on 
this added capital exactly as if it had been a part of 
the investment in the enterprise. 

To secure these returns it pursued the. same course 
that the other railroads of the country followed and 
are following. It increased rates, curtailed service, 
and held down wages. 

When complaint was made of this it pointed to its 
capitalization and asserted that not otherwise could 
it secure returns upon what it was pleased to call its 
investment — ^meaning the total outstanding of its 
stocks and bonds. 

The greater part of these stocks and bonds were 
not investment at all but only surplus earnings taken 
from the public and then converted into additional 

It may be well to run over some of these additions 
to capital and see exactly how they were made. 

We start with the original $15,000,000 of stock (un- 


paid for) that the four Canadians distributed among 
themselves, and the $8,000,000 of bonds with which 
the purchase was made. 

1. An additional $8,000,000 of second mortgage 
bonds to provide funds for extensions and equipment. 
Total capitalization $31,000,000. 

2. June 8, 1882, an issue of $5,000,000 of stock to 
stockholders at par. Market price 140. Melon for 
the stockholders $2,000,000. This was in effect to de- 
prive the road of $2,000,000. If its stock would sell 
for 140 it should have been marketed at that price for 
the benefit of the property. 

3. April 13, 1883, an issue of $10,b00,000 of bonds 
bes^ring 6 per cent interest to stockholders at 10 cents 
on the dollar. This added $10,000,000 to the capitali- 
zation of the property but only $1,000,000 to its equip- 
ment or earning capacity. Every two years it caused 
the property to pay in interest to the stockholders 
more than the total amount produced by the sale of 
bonds. This $600,000 a year was obtained from the 
public by increased charges or impaired service, or 
from the employees by decreased wages, and could be 
obtained in no other way. Total capitalization now 
$46,000,000; total melons to Mr. Hill and his asspci- 
ates, $30,000,000. Total amount actually invested in 
the property not more than $16,000,000. 

4. One year later the capitalization had become 
$51,368,000 without the actual investment of another 
dollar in the enterprise. This had been achieved by 
charging off surplus earnings as operating expenses, 
but chiefly by the purchase of the securities of other 

5» By 1887 these methods had brought the capitali- 


zation to $66,298,977 while surplus earnings of $3,- 
400,000 had been set aside to be divided by means of 
another stock dividend as soon as the proper time 
should come. 

6. By 1888 the management had bought with sur- 
plus earnings $11,750,000 of the securities of other' 
railroads. These were now garnered into the capi- 
talization by a device that ingeniously forestalled criti- 
cism. The $11,750,000 of other railroad securities 
were put together as a collateral trust to secure a new 
issue of $8,000,000 of St. Paul, Minneapolis & Mani- 
toba 5 per cent bonds and these were distributed to 
St. Paul, Minneapolis & Manitoba stockholders at 7§ 
cents on the dollar. 

The market value of the bonds was par. The melon 
to the stockholders, therefore, was $2,000,000 ; the ad- 
dition to the capitalization, $8,000,000; the addition 
to the annual interest charges that public and employ- 
ees must make up, $400,000 a year; the addition to 
the actual investment in the actual enterprise, noth- 

The total capitalization^ was now $80,985,000; total 
melons were $32,000,000, 

On this capitalization, of which not more than one- 
fourth could by any imagination be supposed to rep- 
resent actual investment of anybody's actual money, 
there was being paid by means of rates levied upon 
the public 6 and 7 per cent dividends on the stock and 
5 and 6 per cent on the bonds. 

7. Even so, the returns from these rates were 
greater than all this fictitious capitalization could ab- 
sorb and distribute. By another year there had come 
another accumulation of $10,000,000 of the securities 


of other railroads purchased with the surplus earn- 
ings of this. To take care of this awkward situation 
there was organized a new corporation, the Great 
Northern Railway Company — as a holding concern. 

In those days a "holding company" was something 
of a novelty in railroad operations. It has since be- 
come, by name at least, a familiar part of our trans- 
portation system. Since it neither transports any- 
thing nor helps, furthers, facilitates, supplies nor 
strengthens thaf which transports anything, its func- 
tions might seem to an outsider wholly mysterious. 
There need be no mystery about it. Only one task it 
has to perform in the railroad world. It exists to 
"hold" surplus earnings in one way or another so as 
to conceal them from the public. 

The stock of the new Great Northern Railway Com- 
pany was now issued to stockholders in the old St. 
Paul, Minneapolis & Manitoba Railroad at 50 cents 
on the dollar. They did not give up their old stock. 
They merely paid $50 and received a certificate for 
$100 — ^in the preferred stock of the new concern. 

Then how about the remaining $50? 

That was supposed to be paid"f or by the accumula- 
tion of the securities of other railroads in the treasury 
of the St. Paul, Minneapolis & Manitoba. 

We should stop for a moment to pay heed to this 
operation because it shows so clearly the inevitable 
tendency of railroad development. 

These securities of other railroads had been pur-, 
chased with surplus earnings of the St. Paul, Minne- 
apolis & Manitoba. First, after all pajnment of reason- 
able compensation for service performed, and next, 
after all the payment of dividends on stocks and 



interest on bonds that were never any part of the in- 
vestment in the property, there remained great sur- 
pluses collected by excessive tolls charged to the 

Instead of regarding these as belonging to the pub- 
lic the management assumed them to belong to the 
stockholders (chiefly themselves). They now used 
these surpluses to buy for themselves one-half of each 
share of stock in the new company. 

If this surplus had been distributed to these stock- 
holders by means of a dividend of 20 per cent instead 
of the regular dividend of 6 per cent all the world 
would have learned the facts about the extravagant 
earnings of this railroad and the legislatures would 
have passed laws reducing rates, the taxing bodies 
would have Increased the company's taxes, the em- 
ployees would have demanded increases of wages. 

By shunting the excessive earnings around this 
winding path the public knew nothing about them and 
yet they were distributed none the less to the stock- 
holders — ^fifty cents on each dollar of holdings. 

In reality the dividends paid in 1890 were 24 per 
cent and in 1892 they were 28 per cent — on fictitious 
capital and all. 

The Great Northern Company now proceeded to 
lease the St. Paul, Minneapolis & Manitoba at the rate 
of 6 per cent a year on the capital stock of more than 
$80,000,000. Most of these stocks were fictitious. 

This annual rental of $4,800,000 became an operat- 
ing charge of the Great Northern. 

The next step was to issue $15,000,000 of additional' 
collateral trust bonds, alleged to be secured by a de- 
posit of "Pacific Extension" bonds issued some time 



before by the old company and held in its treasury. 
These collateral trust bonds were issued to stockhold- 
ers at 72V^ cents on the dollar. As they were worth 
par in^the market this melon realized $4,125,000 to 
the stockholders while it added $15,000,000 to the 
total capitalization on which tolls to the public were 

In 1893 there was issued $5,000,000 of additional 
stock to stockholders at par, when the market price 
was 140. This was a melon of $2,000,000 to the stock- 
holders and added $5,000,000 to the capitalization. 

The road was now completed through to the Paclflc 
Coast, the cost of building being defrayed chiefly from 
surplus earnings of the St. Paul, Minneapolis & Mani- 
toba, accumulated as "secret reserves." In addition to 
the surplus earnings that had been swept into the cap- 
ital through the purchase of other securities, and in 
addition to the other evidences of excessive returns, 
there had been gathering all this time "secret re- 
serves" of which no one outside of the management 
had any knowledge. The discovery of this fact might 
have started a question whether any other problem of 
the railroad business was so troublesome as the diffi- 
culty of concealing and absorbing its extravagant 

The stock in the Great Northern, issued to the stock- 
holders of the St. Paul, Minneapolis & Manitoba at 50 
cents on the dollar quickly showed itself to be a valu- 
able possession. In 1895 it paid 5 per cent dividends 
in addition to the 6 per cent "rental" on all the watered 
stock of the parent company, the interest on all 
watered bonds, on all the melons and "benefits" con- 
ferred on the stockholders, on all the "collateral trust 


bonds/' bonds issued at 10 cents on the dollar and 
stocks issued at nothing ; on it all, the whole astonish- 
ing mass of securities created out of nothing, interest 
or dividends ; besides a large surplus. 

The annual interest on the bonds that had been is- 
sued to the stockholders as melons or "benefits" now 
amounted to $1,940,000. Rates were made for the 
public based upon this interest charge and upon others 
that had no better basis. Wages were held down that 
these charges might be met. The line remained single- 
tracked and by Mr. Hill's own admission the service to 
the public was inadequate. But all the interest charges 
were met. 

Much more than met, as a matter of fact. It must 
be evident now that most of the additions to the capi- 
talization were made not only to enrich the fortunate 
owners but to provide channels by which the surplus 
earnings might be taken up . and carried off out of 
sight. In spite of all this ingenuity these surpluses 
continued to pile up in the most embarrassing way 
until the management was driven to the cutting of a 
melon of stupendous size. 

Turn back for a moment to Melon No. 8 in these 
chronicles, the $15,000,000 of "collateral trust" bonds 
issued to the stockholders at 72^^ cents on the dollar. 
These bonds, it will be remembered, were based upon 
the securities of other railroads bought with surplus 
earnings of the St. Paul, Minneapolis & Manitoba, and 
deposited as security for the bonds. It was now de- 
termined to redeem these bonds by exchanging them' 
for a new issue of stock. The $15,000,000 of bonds 
were therefore exchanged against $25,000,000 of stock. 

This seems on the face of it a remarkable transac- 


tion, being the exchange of $15,000,000 for $25,000,- 
OOO, and the more it is studied the more remarkable it 
seems. Eor the $15,000,000 of bonds bore interest at 
the rate of 4 per cent, while the $25,000,000 of new 
stock bore interest at the rate of 7 per cent. Good 
business — for the lucky bondholders. How was it 

Dollar for dollar, so far as the bonds would go. 
That is to say, if a man held $10,000 of the "collateral 
trust bonds" he received $10,000 of the new stock is- 
sue. This left $6,600 of stock to which he was enti- 
tled. For this he paid 60 cents on the dollar and the 
remaining 40 cents was paid for him by the company 
out of more "secret reserves," surplus earnings and 
the accumulations of the securities of other companies 
that had been purchased with such earnings. 

But this was not the whole of this gigantic 'T)ene- 
fit." The 4 per cent bonds had been worth par or 
thereabouts. The 7 per cent stock for which they were 
exchanged was worth 180. Bonds worth $15,000,000 
were exchanged (and exchanged in this highly advan- 
tageous way, the company bearing a large part of the 
purchase price) for stock worth $45,000,000. 

At the lowest calculation, then, here was a melon 
or "benefit" worth $30,000,000 — conferred out of hand 
on the stockholders, as you would give a cigar to a 

On the bonds the annual interest charges, which the 
public must make good in passenger and freight tolls, 
had been $600,000. On the stock that had taken the 
place of these bonds the annual interest charges, which 
the public must make good, were $1,750,000. Differ- 
ence to the public, $1,150,000 every year. 



October, 1898, saw a slight improvement upon even 
this ingenious method of concealing profits and in- 
creasing capitalization. The Great Northern issued to 
its stockholders $25,000,000 of new stock and allowed 
them to pay for it with $20,000,000 of old St. Paul, 
Minneapolis & Manitoba stock, at the rate of a share 
of the old for a share and a quarter of the new. As 
the market value of the new was 192 what they actu- 
ally received was a benefit equivalent to a market 
value of 240. 

The capital stock of the Great Northern (stock, 
please notice, aside from the bonds) was now $75,- 
000,000, of which not more than $30,000,000 could by 
any possibility be regarded as money invested in the 
enterprise. The rest represented gifts, "benefits" and 
melons. In other words, here was at least $40,000,- 
000 of moniey that according to the ancient doctrine 
of the highway belonged to the public. Yet behold 
this most astounding fact, that not only had it been 
taken wrongfully from the public but it had been made 
into a machine automatically working day and night 
to take more money wrongfully from the public. 

It had been added to the capitalization of the enter- 

Of the total capitalization, stocks and bonds, only 
46 per cent could be construed to represent investment. 

If the capitalization had been the investment and 
no more, rates to the public could be cut in half and 
wages could be almost doubled. 

This is obvious. It is shown again by the fact that 
in spite of these repeated additions to the capitaliza- 
tion as channels to take up and conceal profits the 


profits continued to multiply with disconcerting 

The very next year, 1899, it was necessary to issue 
$15,000,000 of additional stock to stockholders at par 
when the market value was 190, a melon of $13,- 

The next year this wap followed with an issue of 
$9,000,000 stock to stockholders at par when the mar- 
ket value was 175, a melon of $6,750,000. 

The next year there was an issue of $25,000,000 of 
stock to stockholders at 80 when the market value 
was 203, a melon of $30,750,000. 

For the next three years the surplus earnings and 
"secret reserves" seem to have accumulated. In 1905 
there was issued to stockholders at par $25,000,000 of 
new stock, of which the market value was 364, a melon 
of $41,000,000. 

These four issues added $74,000,000 to the capitali- 
zation on which the public must pay, through freight 
and passenger tolls, the interest and dividends. They 
added $91,250,000 to the total of "benefits" conferred 
gratuitously upon the stockholders. 

The next year all of them were eclipsed by an Issue 
of $60,000,000 of additional stock to stockholders at 
par when the market value was 240, a melon of $84,- 

It soon appeared that even these great totals did not 
represent nor indicate the real profits of this part of 
the public highways. Besides the purchases of the 
securities of other railroad companies, this manage- 
ment had been quietly at work all these years buying 
with surplus earnings and "secret reserves" many 
kinds of property, including iron mines, coal mines, 


steamships, wharves, lands, elevators and other 
things. These were held nominally by other companies 
of which the Great Northern owned a majority or all 
of the stock. 

It had also been industriously but covertly at work 
buying stock in various railroads of the Northwest, 
some of them supposed to be its competitors. 

It now took all of its stock investments except the 
railroads, consolidated them in one holding company, 
and then presented to the stockholders of the Great 
Northern certificates of shares in the new company 
in proportion to their holdings in the old. 

There were 1,500,000 of these shares and their mar- 
ket value at the time of the distribution was 90. This 
meant that the equivalent of $135,000,000 had been 
distributed among those stockholders, being $135,000,- 
000 of concealed profits of a railroad too poor to pay 
its just share of taxes and continually seeking to in- 
crease its rates. 

Among the properties covered by this distribution 
were many iron mines. The ultimate value of these 
can only be guessed at but the guesses are very high. 
According to one estimate the ore deposits in these 
mines are worth more than one billion dollars. 

If these estimates are well founded, no gold mine 
in the world equals the wealth that was concealed be- 
hind the purchase of bonds at a fraction of their value 
from the unsuspecting Dutch bondholders. 

But we deal here only with certainties, not specu- 
lations. As a matter of certainty, the benefits actu- 
ally and freely conferred upon these stockholders from 
the organiz'ation of the St. Paul, Minneapolis & Mani- 
toba Railroad to the year 1907 totalled $379,325,000. 


In addition to this huge sum there accrued to Mr. Hill 
and his associates certain other sources of revenue, 
the legitimate and sure results of these operations, 
and these bring the total of seventeen years' operation 
of this one branch of the public highways to $407,325,- 
000 as its returns beyond a reasonable compensation 
for the service rendered. 

Lest there should be any room for doubt that this is 
exactly as here stated I append two tables which con- 
tain the whole story up to 1907, thus: 


What Mr. Hill 

What the and his 

treasury of associates 

the railroad got as 

Year. Security Issued. got. extra profits. 
1879 St. Paul, Minneapolis & Manitoba stock, 

original pure water s | 15tOOO,000 

1882 St. Paul, Minneapolis & Manitoba stock at 

par market value 140 $ 5,000,000 2|000,000 

1883 St. Paul, Minneapolis & Manitoba bonds at 

10 cents on the dollar, par 100 1,000,000 9*000,000 

1888 St. Paul, Minneapolis & Manitoba bonds at 

75, par 100 6,000.000 ' 2,000,000 

(Reorganization Into the Great Northern as a Holding Company.) 

1890 Great Northern stocks at 50, market 71.... 10,000,000 4,200.000 

1892 Great Northern bonds at 72}^, par 100.... 10,875,000 4,125,000 

1893 Great Northern stock at 100, market 14a. . . 5,000,000 2,000,000 
1898 Great Northern stock at 60, market 180 15,000,000 30,000,000 

1898 Great Northern stock in exchange for St. 

Paul, Minneapolis & Manitoba, market 

192 28,000,000 

1899 Great Northern stock at 100, market 190... 15,000,000 13,500,000 
1899 Great Northern stock at 100, market 175... 9,000,000 6,750,000 
1901 Great Northern stock at 80, market 203.... 20.000,000 30,750,000 

1905 Great Northern stock at 100, market 264... 25,000,000 41,000,000 

1906 Great Northern stock at 100, market 240... 60,000,000 84,000,000 


1906 Ore certificates at 90 135,000,000 

Totals .$181,875,000 •$407,325,000 



Amount of Interest on Water- 

Great North- Dividends undervalued melons Total Fer 

Year. ern stock. on stocks. bonds.* or "benefits." ^Returns. cent 

1890...$ 20,000,000 $ 200,000 $ 540,000 $ 4,200,000 $ 4,940,000 24.70 

1891. . . 20,000,000 450,000 540,000 990,000 4.95 

1892... 20,000,000 1,000,000 540,000 4,125.000 5,665,000 28.32 

1893... 20,000,000 1,000,000 540,000 2,000,000 3,540,000 17.70 

1894... 25,000,000 1,187,500 540,000 ^J2^522 S-?i 

1895... 25,000,000 1,250,000 540,000 }'J22'2S2 IM 

1896... 25,000,000 1,250,000 540,000 !'Z?S'2S9 M5 

1897... 25,000,000 1,250,000 540,000 .H?2'252 ^.^}5 

1898... 25,000,000 1,500,000 540,000 58,000.000 60,040,000 240.14 

1899... 90,000,000 3,851,033 540.000 20,250,000 24,641,033 27.37 

1900... 99.000,000 6.408,777 540,000 .......... ,g'?tS»777 7.02 

1901... 99,000.000 6,897.369 540.000 30,750.000 38,187,369 38.57 

1902... 125.000.000 8.225.920 540.000 H?5»252 I'U 

1903... 125,000.000 8,673.973 540.000 H15»2J2 I'll 

1904... 125,000.000 8,683.925 540,000 .H^H?^ ^.37 

1905... 125,000,000 8,693,860 540,000 41,000,000 50,233,860 40.18 

1906... 150,000,000 9,148,520 540,000 219,000,000 228.688,520 152.46 

$69,670,877 $9,180,000 $379,325,000 $458,175,877 

Yet even this is far from the end of the narrative. 
Among the railroads of which securities were bought 
with the surplus earnings of the Great Northern was 
its supposed competitor, the Northern Pacific, also a 
through line to the Pacific Coast. Quietly, with a total 
expenditure of $4,133,456, enough Northern Pacific 
stock was bought to give the Great Northern control, 
and thereafter the two roads were operated in the 
one interest. The operation must have been efficient, 
for in ten years the Northm Pacific stock for which 
the Great Northern paid $4,133,456 was worth more 
than six times as much. 

There were now two great railroad systems from 
which surplus earnings and "secret reserves'' were to 
be obtained. To these resources the management 
added in 1905 a controlling interest in the Chicago, 
Burlington & Quincy, one of the most profitable rail- 
roads in the country. It was a master stroke of finance 
that brought this rich property into the Great North- 
ern fold, for ^fter enough stock hs^d been secured to 


get control of the Chicago, Burlington & Quincy, bonds 
were issued upon it sufficient to pay for the purchase 
price, bonds to be paid in twenty years from the sur- 
plus earnings of the Chicago, Burlington & Quincy it- 
self. The plain meaning of this is that the Great 
Northern gets the Chicago, Burlington & Quincy for 

This pregnant fact may well be brought to the 


sober attention of all persons that try to believe a pub- 
lic highway to be a private possession. For how will 
these bonds be paid? From tolls and charges levied 
upon the public. And what then is the final fact about 
these transactions? Nothing except that the public 
buys the property, gives it to the Great Northern, 
which makes of the machinery of the gift a means to 
get more money from the s^me public, for it is 
promptly made the basis for more tolls, passenger and 

In 1908 similar methods added to this aggregation 
of highways the Colorado & Southern, an important 
north and south system that crosses and connects 
nearly all the great transcontinental lines. 

And was this all that this ownership had collected 
in these years — 10,000 miles of highways, hundreds 
of millions of dollars of the public's money, a gi*eat 
machine that made profits faster than they could be 
concealed or distributed, a device that added other 
highways without expense to the projectors, the pros- 
pect of still greater dominion and greater profits and 
a greater machine? 

By no means. There was also a power generated 
beyond anything ever known to kings, emperors or sul- 
tans. It was a power that chose governors and legis^- 


lators, sent men to Congress or defeated them, packed 
party conventions, chose candidates, passed laws. 

It was also a power that censored, controlled or in- 
fluenced the press, so that every day millions of per- 
sons read things that were not true and believed them, 
that the interests of this machine might be furthered 
and safeguarded, that more profits might be trans- 
formed into more machines to make more profits and 
more machines. 

Uiider this influence a thousand newspapers pub- 
lished daily or weekly alleged news favorable to the 
railroad cause, and a large part of the public came to 
believe them. 

When the city of Minneapolis wished to have a new 
railroad station instead of the rat-infested and stink- 
ing cellar it was then obliged to use, it gave a ban- 
quet to Mr. Hill and asked if it might, please, have a 
new station and Mr. Hill said. No. 

When the city of Spokane desired some relief from 
the extortionate and insane freight rates that were 
hampering its normal growth it asked Mr. Hill and 
Mr. Hill said. No. 

When a man wished to run for Congress he went to 
Mr. Hill and Mr. Hill looked him over and sized him 
up and said Yes, or No, as seemed to him best and 
most desirable. 

Whatever he wished he got. Except one thing. He 
said a few years before his death that the railroads of 
the United States needed $7,000,000,000 (seven billion 
dollars), to put them into physical condition to meet 
the service needs of the country. As they could not 
possibly obtain this amount from private sources he 


wished the government of the United States to supply 
them with it. 

But he died too soon. If he had lived a few years 
longer he would have seen the government of the 
United States opening its treasury to repair and re- 
store the highways of the nation wrecked and ruined 
after seventy years of the full swing of the idea of 
which Mr. Hill was so marvelous an exponent. 

The idea that public highways are a private graft. 

The Great Northern Company on December 31, 
1920 : 

Capital stock, $249,478,250; bonds, $142,788,515; 
interest on bonds, $7,375,984 ; dividends on stock, $17,- 
462,916 ; surplus for the year, $1,815,496. 

On this capitalization put together in the way we 
have described, higher rates were demanded in 1920 
and lower wages in 1922. 



The True Use of the Holding Company. 

It has become common in recent years to assert that 
the difficulties of the American Railroads are due to 
two causes, the unreasonable demands of labor and 
the results of government operation for the period of 
the war. 

But the railroads of America were wrecked before 
labor made any demand for an increase in wages and 
long before the government assumed their operation. 

One fact alone, if there were nothing else, would 
show how they were wrecked. 

Their capitalization has increased more rapidly 
than their operating revenues. 

No matter what labor might do or the government, 
this one condition was certain to wreck them sooner 
or later and e<iually certain, while the wrecking was 
going on, to increase greatly the rates the public must 
pay for transportation. 

This is to be shown more effectively by illustration 
than in any other way, and one of the many illustra- 
tions that reveal it' convincingly is the next enterprise 
to be considered.' 

The Philadelphia & Reading Railroad was chartered 
in 1833 and built a line from Philadelphia to Mount 
Carbon in the coal region. With the development ot 


the anthracite business this speedily became one ol 
the most profitable railroads in the country. 

In 1871 it went into coal mining as well as coal haul- 
ing, bought (with surplus profits) 100,000 acres of 
coal and iron lands in the Schuylkill region and or- 
ganized the Philadelphia & Reading Coal and Iron 
Company (having the same owners) to care for the 
mining end of its activities. 

This purchase, even at that day, alarmed the easy- 
going Pensylvanians, and the same year they put into 
their new constitution a clause that forbade a rail- 
road company to own more than 30,000 acres of coal 
land. They did not wish to be robbed of everything. 

As the business and profits of the company were 
enormous and almost phenomenal, the fortunate own- 
ers began early to develop the first purpose of the 
American railroad, which, as we have seen, is to issue, 
juggle and manipulate securities upon which the pub- 
lic must pay the dividends and interest. These own- 
ers did the thing that the valet tribe so vociferously 
insists is perfectly legitimate; that is, they "capital- 
ized the earning power" (to the king's taste) ; they 
"issued securities up to the true value of the enter- 
prise" ; they "capitalized the actual value of the prop- 
erty" until they had adorned it with a line of securi- 
ties the like of which had never before been seen in 
this world. There was every kind of an interest-bear- 
ing document that had ever been known in high finance, 
and then some. Melons grew in that garden in a way 
that bewildered all the horticulturists of Wall Street. 
Whenever the dividends reached 10 per cent and left 
an unwieldy surplus the fortunate gentlemen brought 


out a large, fresh melon or doubled the capital stock 
(for themselves) and began again. 

Extra earnings and surpluses they invested in vari- 
ous properties and then issued more capitalization 
against such properties, accumulated thus a new sur- 
plus from the people and were ready to repeat the 
process; which, as it has received the approval of the 
entire kept press, must be unobjectionable, no matter 
how much it may add to the burden of the community. 

For example, with surplus earnings thus acquired 
these gentlemen built at Port Richmond a great coal 
terminal, worth millions of dollars. Then against this 
they issued new stocks and bonds worth more than the 
terminal. Then they began to collect from the public 
on these stocks and bonds interest'^ and dividend 
charges that the public is paying today, although it 
has already paid for that terminal thrice over. 

By 1877 these agreeable processes had been carried 
to a point where the Philadelphia & Reading was (for 
the time) the most heavily-capitalized railroad in the 

The temptation had been too great; the printing 
press was too handy. 

Any day the directors could make fortunes by the 
simple, child-like operation of issuing bonds to them- 
selves at 70, and selling the same bonds to the public 
at 120, receiving, with their huge returns, general 
plaudits as ingenious masters of financial mysteries. 

The common stock was now $32,726,875, preferred 
$1,551,800, funded debt $65,000,000 ;^ total $99,278,- 
175, or $303,603 a mile ; a fact that caused the hardi- 
est old financial buccaneers to mutter and stare. 

But the thing had been far overdone; the printing 


press had been overworked. Far too many stocks and 
bonds iiad been issued for the benefits of the Insiders 
and unloaded upon the innocent public. 

The interest charges that had been piled up in this 
wild riot of black-flag finance were more than even 
the phenomenal earning power of the enterprise could 
sustain. Default followed, and on May 28, 1880, the 
road pased into the hands of a receiver. 

But, even in its wrecked and waterlogged state, the 
wreckers could not leave it alone. The takings had 
been too goodly ; the chances were too alluring. They 
got up a reorganization scheme by which there was 
plumped upon the limping concern yet another mort- 
gage, this time for the pretended purpode of taking 
care of the funded debt and providing a working cap- 

Besides this were added $25,000,000 of deferred in- 
come bonds that were sold to stockholders at 30 per 
cent of their par value. 

This, adding $25,000,000 to the capitalization, 
already extravagant and insupportable, but only 
$7,500,000 to the company's treasury, may be regarded 
as a performance of rare hardihood. 

Naturally its result was another receivership in 
three weeks; whereupon it was discovered that the 
poor old concern had a floating debt of $23,000,000. 

For two years the receivers banged the helm to and 
fro without much progress. Whereupon the Morgan 
ship hove in sight and took it into port with another 

This provided for a fresh issue of capitalization as 
follows : 


$100yOOOyOOO new 4 per cent general mortgage bonds. 

$24,410,822 1st preference income bonds. 
$26,140,516 2nd preference income bonds. ^ 

$14,956,016 3rd preference income bonds. 

Quite a tidy addition, as you will see. 

By this juggling the old and dubious income bonds 
were taken care of, their holders made happy, cred- 
itors satisfied, working capital was provided, the capi- 
talization was greatly increased, the reorganizing or 
remorganizing firm was abundantly profited, a^d a 
fresh burden was laid upon the ever patient public. 

Thus, for five years the thing scraped along, 
chiseling the increased interest charges and managing 
to keep afloat. 

Then appeared upon the financial scenes a new genius 
in the person of Mr. Alexander McLeod, a trust com- 
mander or fleet captain much in advance of his times. 
He conceived the idea of a gigantic combination to in- 
clude the three great coal-carrying and coal-mining 
railroadls — the Philadelphia & Reading, Oentrtil of 
New Jersey, and Lehigh Valley — ^to control the an- 
thracite output, abolish competition, advance prices, 
increase revenues and therewith revive the printing 
press and issue additional securities in accordance 
with the first principle of American railroad business. 

The three roads were duly combined, the wholesale 
price of coal was advanced 50 cents a ton, production 
was restricted in the mining region, and all looked 
well for Captain McLeod when the plan hit an un- 
charted and unsuspected reef. 

The public revolted. 

A fierce clamor broke out against the combination: 
The Attorney Generals of New Jersey and Pennsyl- 


vania were compelled to take action against it, and 
the courts dissolved it. 

The result of which was another receivership, the 
old hooker once more waterlogged, ahd the low, rakish 
Morgan craft Reorganization again bearing down 
upon her. This time the Morgan crew loaded upon 
the ship the following new issues in lieu of the old : 

$114,000,000 4 per cent general mortgage bonds. 
$28,000,000 1st preference 4 per cent stock. 
$42,000,000 2nd preference 4 i>er cent stock. 
$70,000,000 common stock. 

Total.. $254,000,000 

Of which the crew of the Reorganization took 
$4,000^00 in prize money for devising this marvelous 

The rotten old stock was assessed $20,663,953 for 
expenses ; after which it was exchanged for the new. 

Total capitalization now $254,000,000. Mileage 
owned, about the same as in 1877, 327 miles. 

But by this time the price of anthracite coal had 
been greatly and arbitrarily increased by the Interests 
that control it, which are also the Interests that con- 
trol this and the other coal railroads. Because of this 
arbitrary and unjust increase, the profits of the Phila- 
delphia & Reading were richly restored and refreshed. 
The income, thus derived directly from indefensible 
levies upon the public, began to rise above even the 
charges born by this great overcapitalization. Loaded 
to the guards as it was with every kind of security the 
printing press could turn out for the making of great 
private fortunes, the gigantic coal business heaped the 


profits still higher, and, to conceal them and distribute 
them a new plan was required. 

There was now organized the Philadelphia & Read- 
ing Railway Company, which took over the roadbed 
and track of the Philadelphia & Reading Railroad 
Company but not the equipment. The Philadelphia & 
Reading Railroad Company owned all the equipment 
but no roadbed nor track. By ingenious leasing back 
and forth between these two nominal concerns at ex- 
cessive rates on excessive valuations, a deal of profits 
could be concealed. 

A third corporation, called the Reading Company, 
was arranged to care for these juggles, and also for 
the improper coal mining and the prohibited coal 
lands. The state constitution still forbade a railroad 
company to own more than 30,000 acres of coal lands, 
and what are 80,000 acres to an enterprise that con- 
trols about one-third of the entire anthracite output? 

Therefore Mr. Baer, the president, known fti history 
as "Divine Right Baer," in the exercise, doubtless, of 
his peculiar relations with deity, had hunted the by- 
paths of forgotten legislation until he found the very 
thing for the emergency. It was a dust-covered cor- 
poration chartered in May, 1871, as the Excelsior 
Company, the name being changed in 1873 to the 
National Company. It had a charter that authorized 
it to do everything except hold a prayer meeting 
(which, in Mr. Baer's case, was plainly unnecessary) , 
and as this charter had been granted previous to the 
constitution of 1871, the concern was immune against 
that 30,000-acre limitation. 

The cheerful reorganizers from the Morgan ship 
got possession of this antique craft, changed its name 


to the Reading Company, increased its capital stock 
from $100,000 to $40,000,000, and then to $140,000,- 
000, and were thus equipped to hold coal lands as well 
as railroads. 

Moreover, they had now an infallible device to con- 
ceal and distribute the enormous profits of the rail- 
road. ^ 

The capital stock of the Philadelphia & Reading 
Railway Company, the operating concern, was now 
watered from $20,589,300 to $42,871,000— held by the 
Reading Company, the holding conceni. 

On this capital stock of $42,871,000 the operating 
concern has paid to the holding concern the following 
dividends : 

1904 , 8 per cent. 

1905 20 *• " 

1906 , 30 " " 

1907 80 " " 

1908 80 '* " 

1909 25 " " 

1910 25 " " 

1911 25 " " 

1911 80 " " 

1912 15 « " 

1913 15. « " 

1914 20 " " 

1915 12% " " 

1916 25 " " 

1917 15 ** " 

1918 15 " " 

1919 la " •* 

For this great golden tide the Reading Company 
prepared the channels and canals that it might be so 
divided no single stream of it should look big. 

Because, whereas the capital stock of the operating 


company was $42,871,000, the capital stock of the 
holding company was $140,000,000, divided into three 
clases, and, besides, there were $114,000,000 of bonds 
to sop up the golden stream. 

What is 30 per cent, therefore, on the capital stock 
of the operating company becames 4 or 6 per cent 
when it has been passed along to the holding company 
and split up into dividends on $140,000,000 of stock 
and interest on $114,000,000 of bonds. 

The exact operation is here as clear as day. When 
the rich dividends received by the Reading Company 
(as a holding company) had been split into the vari- 
ous chanels its great capitalization provided they ap- 
peared as only 4 per cent dividends from 1904 to 1909, 
6 per cent from 1909 to 1913, and 8 per cent there- 

From which you can see the truly bea-utif ul func- 
tions of a Holding Company. 

Meantime, even the Reading Company, the holding 
concern, was putting back surplus profits into the 
property until the analysis of Mr. John Moody showed 
that its real returns, on watered stock and all, were 
28 per cent a year. 

It is for the sake of such a shell game as this that 
an increase of freight rates is demanded. It is because 
of such financial operations as these that the main- 
tenance expenditures are skimped, the service is inade- 
quate, and wages must be reduced. 

The reason why the dividends in the foregoing table 
showed a decrease after 1911 may be guessed from 
the fact that about that time the attention of the De- 
partment of Justice of the United States was called 
to this device and began suit to dissolve it. 


This suit went its way for some years and in 19^0 
reached the Supreme Court, which on April 26 ren- 
dered a decision upholding the contention of the De- 
partment of Justice that the combination engineered 
by the Reading Company was in violation of the Sher- 
man Act. 

The decision, however, affects only the form of the 
combination, and not its essence. The form being 
changed to be in line v/ith the law, the essentials of 
the arrangement will go on as before. 

By means of a holding company profits of 28 per 
cent a year are made to look like 6 per cent or less 
and by alleging these and not the actual returns, the 
Interstate Commerce Commission is induced to allow 
an increase of freight and passenger rates and the 
Railroad Labor Board to decree a decrease of wages 
for the railroad workers. 

The American Railroad as it really is. 



A Sample of Artistic Wreckage. 

In 1914 the examining engineers attached to the 
Interstate Commerce Commission made to that body 
a startling report concerning the physical condition 
of one of the most important railroads of the Central 

They declared that seventy-eight miles of its line 
was "in bad condition and unsafe." 

One stretch of track, fourteen miles long, was in a 
state so bad that it was operated only "under cau- 
tion," and the chief operating officer admitted that it 
ought hot to be used at all. 

Some of the line was equipped with rails weighing 
only 60 pounds to the yard and some with rails still 
lighter, and a sixty-pound rail was at least twenty 
pounds under normal weight for the traffic the line 
was bearing. 

Two hundred and sixty-three miles of track was 
reported to be "in poor condition." Thirty-four per 
cent of the locomotives were far below the par of effi- 

The whole line was single tracked. The engineers 
did not say so, but more than a half of this line had 
a traffic absolutely demanding double tracks to 
carry it. 

The railroad thus condemned was one of the chief 


arteries by which food supplies were distributed to 
two great population centers of the interior. It trav- 
ersed a region of great fertility that produced im- 
mense quantities of small fruits and vegetables for 
the population of Chicago. It ran through an old and 
well-settled country, not through a frontier. It was 
an old and long-established enterprise, not a recent 
venture in transportation. 

It was doing about one-half the work it ought to 
do and doing that at the risk of the lives of employes 
and the public. 

Every feature of its business situation pointed to 
profits. Its traffic was dense; it had short hauls; to 
many communities it was the only rail highway. 

Yet it was broken down physically and in 1915 its 
financial wreck was complete when it passed into the 
hands of a receiver. 

It had defaulted in the pa3anents on its bonds. 

For some, months before that its physical condi- 
tion had been so bad that with great difficulty traina 
made their way over certain parts of it, more than 40 
per cent of the passenger trains were late, accidents 
were frequent. Shippers bitterly complained of the 
service ; to travelers the name of the road became a 
by-word. It was the "Poor Old Marquette !'* 

How did all this come about? How did a great and 
main-traveled highway go thus to destruction? 

Take note, then, of a story right to our purpose, 
typical, interesting, instructive. 

The railroad" business of today is conducted with 
the assistance of a large corps of press agents, pub- 
licity writers and newspaper eulogists. These assure 
u@ thf^t railroad metliods hav^ undergone a complete 


change since the wicked days of the elder Vanderbilt 
and his kind. Then indeed railroad exploiters per- 
formed many deeds calculated to shock a nice and re- 
fined taste, but today all this is changed. No more 
stock watering, no more illegality; everything now is 
straight, pure and righteous altogether in the man- 
agement of our railroads. Men of a different class 
now direct and control them. 

So they tell us. Yet the story of the Pere Marquette 
is not at all geared to these pleasing assurances. Here 
was a case where men of the highest standing and 
repute, men still honored and quoted in our gravest 
and best business circles, did things to a railroad that 
even called down the severe rebuke of the Interstate 
Commerce Commission — and you will admit that this 
is saying much. 

The present Pere Marquette Company was organized 
in 1900. It was a combination of three companies that 
had long been familiar in the transportation history 
and troubles of Michigan — ^the Flint & Pere Marquette, 
the Detroit, Grand Rapids & Western and the Chicago 
& West Michigan. 

Each of these concerns was in itself heavily over- 
capitalized. Each was carrying a huge load of stocks 
and bonds that represented no money ever invested 
in the enterprise but only deals, i^elons and gifts to 
the Insiders. The total of the three roads was $47,- 
328,668— $22,846,500 being in stocks and $24,482,168 
in bonds. It was estimated that the actual investment 
was less than $35,000,000 and the actual cost less than 

You should observe here that this actual cost is 
about the same as the total amount of bonds out- 


standing. This is the usual condition among rail- 
roads. They are built for the bonds that are issued 
upon them and the stock in their capitalization is ficti- 
tious capital reserved for the profit of the projectors. 

Nevertheless, such stock is included in the capital- 
ization, where it forms part of the basis upon which 
rates are fixed and wages determined. 

To the $20,000,000 of pure water in the capitaliza- 
tion of these three railroads, more was added when 
they came to be consolidated. 

Of course. That, again, is the usual way. Every 
consolidation means more fictitious capital. Con- 
solidations, it seems, cannot be effected in any other 
way than with water. On this occasion the total stock 
was increased to $28,000^)00, which turned on the 
flood for $5,000,000. 

The bonds of the three old companies were assumed 
by the new concern, the old capital stock was ex- 
changed for the new, and for the time being the 
$5,000,000 of additional water was allowed to rest in 
the new concern's treasury. 

For the next three years it rumbled along on about 
this basis. 

It could not earn enough to pay dividends on its 
watered common stock, but it kept up the interest pay- 
ments on its bonds, even after these had been increased 
by a new issue of $6,000,000. And now we come to 
the cream of the story. 

Certain Boston stock operators, some of them busi- 
ness men of high renown, had long been hovering about 
the flanks of the Pere Marquette, trading in its stock 
and making deals with great New York speculators 
about it. One of them bad been made a director of 


the new company, when the consolidation was effect- 
ed in 1900, and took an active interest in its affairs. 

In December, 1902, the Boston interests made 
a sudden movement in Pere Marquette, appearing 
with enough of the stock to give the control of the 
road to them and their friends. With these friends 
they now filled a majority of the places on the board 
of directors and assumed entire management of the 

They had bought the stock at 85 — ^not a majority 
of it nor near a majority, but to secure 20 per cent of 
a railroad's stock is often enough to assume control 
of the whole concern — a fact that explains how thirty 
men in New York City can control practically the 
whole railroad mileage of the United States. 

The new management started with a new policy. It 
sought to extend the road, boomed the stock and added 
lavishly to the bonded indebtedness. 

This lasted eighteen months, and by the end of that 
time the Boston management had achieved something 
that all observers would have said offhand was im- 
posible and not in nature. 

It had paid dividends on both classes of Pere Mar- 
quette stock. 

Here was something historic in High Finance — 
dividends on poor old Pere Marquette! Surely the 
new management must be composed of wizards. They 
made this poor old thing pay. 

A thrill of joyous emotion ran through the owners 
that for years had been hanging to their stock certifi- 
cates. The first dividend, on common August 31, 1903, 
at the rate of 4 per cent a year, wa3 followed by 

nam PEftE LtAftQUETTE 2dS 

another on preferred in December, and on March 1, 
1904, came gladder tidings of still greater joy. 

A dividend had been declared at the rate of 6 per 
cent a year ! 

The railroad world looked with amazement upon 
these triumphs of skillful business. These, certainly, 
were the men that knew how to run a railroad. They 
produced results— «nd dividends. 

Immediately after this astounding feat the Boston 
management was observed to be fostering a consolida- 
tion of the Pere Marquette with the Cincinnati, Ham- 
ilton & Dayton, that grand old piece of railroad wreck- 
age that in a previous chapter we have examined with 
interest. The next thing Wall Street knew a syndi- 
cate in the Cincinnati, Hamilton & Dayton had bought 
the. stock in the Pere Marquette held by the Boston 

Price — 125. Not bad for a stock paying 6 per cent. 

An expert had examined the property and said it 
was fcood and there was the solid fact of these divi- 
dends in succession, made with apparent ease. 

The Boston crowd had bought at 85 or thereabouts. 
It sold at 125. Also good business. 

Before long it was apparent that what the Cincin- 
nati, Hamilton & Dayton people had picked was not 
a railroad but a large sour lemon. 

These three dividends, the only dividends in the 
long history of the enterprise, had not been earned. 
They had been paid with money obtained from these 
sources : 

1. By shutting off the normal expenditures for 
maintenance and repairs until the poor old thing 
almost fell to pieces. 


2. By expert bookkeeping. 

3. By allowing current liabilities to pile up. 
These three we know. It is surmised that there 

was still another source and that it consisted of ap- 
plying to dividend payments the proceeds of the sale 
of securities. 

From the time that these triumphs of high finance 
were disclosed the road ceased to perform its full func- 
tions as a common carrier. That is, it failed thence- 
forth to handle its traffic so as to meet the needs of 
the public it was chartered to serve. 

I will give but one illustration of its physical de- 

In the eighteen months in which the dividends were 
paid scarcely any ties were replaced along the line. 

The lowest average of tie renewal believd to be con- 
sistent with safety is 9 per cent a year, or every year 
276 new ties to the mile. 

The brilliant management that paid those dividends 
left the road so impoverished that for years afterward 
the tie renewals were far under normal, coming down 
to 3.8 per cent a year, or 122 new ties to the mile. 

No wonder the Interstate Commerce engineers de- 
nounced this road as in inferior condition and in some 
places not safe. 

When you have rotten ties you have stretches of 
track over which trains must proceed at reduced speed 
and you have accidents. These block the operation of 
the road, upset schedules and bring traffic to a halt. 

Direct cause— direct result. 

Gentlemen on the Inside caused the road to pay 
these dividends, ran the price up from 85 to 125 and 
sold out at a gorgeous profit. 


But they left this wreck behind them for the public 
to stagger under, enduring bad service and high rates. 

And they left these increases of capitalization, rep- 
resenting no investment in the enterprise, on which 
rates are based and wages determined. 

For all of their achievements in price booming was 
at the expense of the capitalization of the road as well 
as of its physical soundness. All of it is still in the 
capitalization on which the Esch-Cummins bill guar- 
antees returns at the expense of the people, the real 
owners of the public highways. 

One of the results of the wizardry of paying un- 
earned dividends was a receivership; that is to say, 
bankruptcy. Next, of course, for the desperate condi- 
tion of this as of other railroad properties the press 
agents ingeniously blamed the workers. The workers 
made extortionate demands for increased pay, you 
know ; the greedy things. 

A casual inspection of the foregoing chapter of the 
American Railroad As It Is reveals the fact that if 
thete had been included in the capitalization of the 
Pere Marquette only the money actually invested in 
the enterprise it could pay twice the present wage 
scale and yield large dividends. 

In view of this fact It might be well to lay off for a 
time about the greedy, insatiable workers and make 
a few cursory remarks about the influences that were 
really responsible for the smash and its results. 

Capitalization of the Pere Marquette on December 
31, 1920: 

Capital stock, $68,675,000 ; regular bonds, $30,455,- 
000 ; equipment obligations, $9,127,520 ; collateral trust 
bonds, $5,870,000; current liabilities, $12,186,147. 


Total, $126,263,667; $56,000 a mile. Actual invest- 
ment a little more than one-half of this. It was the 
effort to strain out of the revenues of the road money 
to pay interest and dividends on the capitalization 
beyond the actual investment that called down the 

Since then a different management has been obliged 
to strain every resource of the property that it might 
restore conditions of safety, replace the ties, relay the 
iron, renew the equipment. The figures above quoted 
tell the story. Great business, no profits because of 
the results of these old-time financial gyrations, en- 
forced economies, increased rates, every effort to keep 
down wages — ^it must be so. When the workers object 
to being made the sufferers for the exploits of High 
Finance and the fortune grabbers, the press denounces 
those workers and holds them responsible for any in- 
terruption in the transportation service. 

The same press says never a word about the men 
and operations that wrecked the property and were the 
real cause of all its troubles. 

Great press ! v 



Wreckage by Syndicates. 

On May 27, 1913, receivers were appointed in the 
United States court for the St. Louis & San Francisco 

This was a disaster even more remarkable than 
that of the Pere Marquette. The St. Louis & San 
Francisco was an even larger and more important 
highway. Its business and apparent prosperity were 
conspicuously greater. It had 7,000 miles of line and 
conected important centers. In fifteen years its net 
operating income had increased six-fold. 

What was still more noteworthy, every year it had 
paid dividends on its stock, always promptly and at 
a fair rate. Railroads that can pay dividends do not 
usually go bankrupt. 

Bankrupt, nevertheless, was this concern, and 
wrecked, beyond a doubt. Like the rest of the Ameri- 
can railroad companies, it had been kiting equipment 
notes and had defaulted on the interest on $2,250,000 
of such notes — tissued June 1, 1911, for only two years. 

The balance sheet also showed that it had run be- 
hind on its operation by $1,069,915. That is, its re- 
ceipts, heavy as they were, had not been big enough 
to meet its expenses and the interest on its bonds. 
And still it had paid dividends. 

Ever since a reorganization of the property fifteen 


years before this railroad had been controlled by one 
group of men, which included New York bankers of 
great renown. 

One of their policies, it appeared, had been to add 
to the mileage the company operated by buying up 
smaller roads, and it was when this practice was in- 
vestigated that the reason for the ruin appeared 
clear — and not exhilarating. 

I will give some examples. In October, 1901, a syn- 
dicate was organized to build a road called the Okla- 
homa & Western. Three influential officers of the St. 
Louis & San Francisco were in^on this pool; the others 
were what was known as the 'Frisco crowd. They 
subscribed $2,148,000, of which $2,097,043 was paid 
in, and seventeen months later sold their railroad to 
their own St. Louis & San Francisco at a price that 
netted them a profit of $369,278. 

In other words, the St. Louis & San Francisco added 
to its capitalization $369,279 that represented nothing 
but the profits of the syndicate, its own officers. 

In July, 1902, a syndicate that included four officers 
and directors of the St. Louis & San Francisco was 
formed to finance the building of a railroad called the 
St. Louis, San Francisco & New Orleans. 

Sixteen months later this syndicate was dissolved, 
having sold their property to the St. Louis & San 
Francisco, as before. They had subscribed $5,300,000. 
They received $5,888,888 in the, 4 per cent bonds of 
the St. Louis, San Francisco & New Orleans and 
$1,060,000 of preferred stock of the same company. 
These Securities were then refunded into security is- 
sues of the St. Louis & San Francisco on the basis of 
90 for the bonds and 79 for the preferred stock. 


This reaped another rich harvest for the syndicate 
and isaddled the main company with another block of 
capitalization representing no investment. 

In April, 1902, another syndicate of about the same 
composition was formed to buy the property of the 
St. Louis & Gulf Railroad Company. When purchased 
it was consolidated with another piece of junk, the 
St. Louis, Memphis & Southeastern, and the two sold 
to the St. Louis & San Francisco. The function of 
the syndicate seemed to have been about as important 
as that of a broker or real estate agent and was really 
less than that. The essence of the deal was that the 
syndicate as a syndicate sold the St. Louis & San Fran- 
cisco, which they controlled, a piece of undesirable 
property at a high price that they had bought a short 
time before at a low price ; and pocketed the difference. 

The details of the transaction were that the syndi- 
cate received $4,920,000 of the bonds of the St. Louis 
& Gulf and exchanged them for 4V^ per cent bonds of 
the St. Louis, Memphis & Southeastern on the basis 
of $903.83 for each $1,000 bond of the old company. 
The new bonds, being guaranteed by the St. Louis & 
San Francisco, that good old dividend payer, were 
sold without difficulty in New York, for $4,288,123. 
The syndicate had subscribed $2,100,000 for this op- 
eration. It lasted a little more than a year. When 
it dissolved it had made a net profit of $1,385,696 and 
landed another great chunk upon the capitalization of 
the St. Louis & San Francisco, where it remained and 
became with the other additions a basis for rates and 

The St. Louis & San Francisco could have acquired 



this property without the intervention of the syndi- 
cate for one-half the sum it paid. 

A sjmdicate was formed December 21, 1897, to 
''finance the construction" of the St. Louis & Okla- 
homa City Railroad. One million dollars was sub- 
scribed; $264,494 was paid or promised to contractors 
for work on tiie road. On April 1, 1899, the property 
was sold to the St. Louis & San Francisco for $1,968,- 
700, and the syndicators reaped a neat profit of 

This gave the capitalization another boost. 

On January' 10, 1900, the St. Louis, Oklahoma & 
Southern Railroad Company made a contract with 
Johnson Brothers & Forsyth, railroad builders, ior 
the construction of its line. The contractors were to 
receive $5,500,000 in capital stock of the company and 
then bonds at the rate of $22,500 a mile. Thirteen 
days later a syndicate of St. Louis & San Francisco 
Insiders agreed with the contractors to take these 
bonds off their hands at 78^ per cent of their par 
value, payment to be made as the work progressed. 

The bonds were then guaranteed by the St. Louis & 
San Francisco. 

The St. Louis & San Francisco next acquired for-^ 
mal possession of the St. L^is, Oklahoma & South- 
eastern and exchanged these bonds for its own on the 
basis of 95. 

They had been purchased at 78^^. This netted the 
syndicate $719,574 and boosted the capitalization 
another notch. 

A syndicate of insiders was formed June 16, 1902, 
to purchase the securities of the Arkansas Valley & 
Western Railroad. The paid-in sutiscription was ^ 


$3,046,635. On March 1, 1904, the property was sold 
to the St. Louis & San Francisco for $3,825,000. The 
syndicate had incurred a total expense of $87.57, 
from which we may glimpse the important nature of 
its functions. There was to be deducted from the 
purchase price $215,865 due to contractors, which left 
a net profit to the subscribers of $589,767, having in 
the meantime again hoisted the capitalization. A di- 
rector and five of the controlling spirits of the St. 
Louis & San Francisco shared in this Good Thing. 

New Iberia & Northern and Iberia, St. Mary & 
Eastern Railroads. These lines were constructed with 
funds supplied by a syndicate of Insiders, who ad- 
vanced $1,000,000 in cash and obtained $1,000,000 on 
their notes through St. Louis and New Orleans Trust 

There was expended on construction a little less 
than $2,000,000, after which the St. Louis & San 
Francisco bought the property for $2,495,088. The 
terms of the sale were such as to make a profit to the 
S3mdicate of an even $500,000 — cleared in a few 
months. In addition to which the members retained 
an interest in unpaid bonuses worth about $100,000. 
The president of the St. Louis & San Francisco, who 
was one of the members, paid $190,000 for his share 
in the deal. 

These are samples of the means by which the cai)- 
italization of the St. Louis & San Francisco was 
swelled. How profitable the operations were to the 
syndicates and how costly to the railroad may be gath- 
ered from the following summary: 


Amount of Syndicate Syndicate's 

Name of Railroad. Subscription. Profit. 

Oklahoma City & Western $ 2,097,043 % 369,279 

St. Louis, San Francisco & 

New Orleans 5,300,000 837,400 

St. Louis & Gulf 2,700,000 1,385,696 

St. Louis & Oklahoma City... 1,000,000 556,150 
St. Louis, Oklahoma & 

Southern 3,423,432 719,674 

Arkansas Valley & Western . . 3,046,635 589,767 

New Iberia & Northern 2,000,000 500,000 

St. Louis, Brownsville & 

Mexico 3,981,000 3,011,928 

Colorado Southern, New 

Orleans & Pacific 3,000,000 375,000 

Totals $26,548,111 ^8,444,796 

It is thus, with other ways, that railroad capital is 
created and a basis reached for rates to the public 
and wages to the employees. 

Of some of the other ways perhaps you might now 
like to be refreshed by a glimpse. If so, the source is 
handy. The St. Louis & San Francisco seems to have 
embraced them all. 

There was in Texas a corporation called the Kirby 
Lumber Company that in January, 1903, gave three 
notes of $200,000 each to B. F. Yoakum, James Camp- 
bell and Henry Clay Pierce of the St. Louis & San 
Francisco Railroad Company. The railroad company 
next bought these notes at their face value and re- 
turned them to the lumber company as part pajnnent 
fdr the purchase of 8,150 shares of the preferred stock 
of that company. What a railroad company wanted 
of ownership in a lumber company does not appear. 
It cc^uld haraiy have bee^ s'^eMng pydfits, folr the lum 



ber company seems never to have made any. In all 
the railroad company invested $1,248,750 in this stock 
(which seems to have been owned by Insiders) and 
got from it "not a cent. The purchase price was added 
to the capital of the St. Louis & San Francisco, where 
it was equivalent to an annual charge upon the earn- 
ings of $50,000. 

That is to say, every year $50,000 must be wrested 
from shippers or from employees to make up the inter- 
est on this investment. And it is thus that railroad 
capital is created. / 

In reviewing this strange incident we come upon the 
fact that one J. W. Bailey, of Texas, received $25,000 
for negotiating the deal. The Congressional Directory 
shows that at this time a J. W. Bailey was a Senator 
of the United States from the State of Texas, where 
he was a popular and powerful political leader. 

How $25,000 could have been earned in negotiating 
such a transaction is not disclosed. 

In 1903 the St. Louis & San Francisco was swept 
into the great net that the exploiters of the Rock Island 
system were dragging through the southwestern rail- 
road world. The Insiders continued to be Inside and 
to find their position agreeable and profitable. The 
Rock Island had Insiders also, but the two seemed to 
have worked together quite harmoniously. As for 
instance : 

On March 30, 1907, the St. Louis & San Francisco 
entered into a very singular contract with the Craw- 
ford County Mining Company of Kansas by which 
the railroad company was made liable for any default 
in the interest on the mining company's bonds. There 
was a deficit at the rate of $27,000 a year, and the 

!&44 RAtLBOAD MELoUd, ttATEd ANt) WAO£d 

railroad company, making this good, charged it up as 
operating expenses, where it appeared as the rental 
of a side track at the mining company's mine at Pitts- 
burg, Kansas. If the side track had been a mile long 
its total value might have been one-half of the amount 
of this alleged annual rental. 

All the capital stock of the mining company was 
owned by the Insiders of the Rock Island. 

In 1913 the interest on the various sums taken from 
the railroad company by syndicate deals, discounts, 
investments like that in the Kirby Lumber Company, 
the unfortunate deal with the Chicago & Eastern Dli- 
nois, and so on, would have equaled, at 5 per cent, 
$3,745,550 a year. 

This seems to be about 35 per cent of the company's 
total interest charges and furnishes valuable light 
upon railroad capitalization, what it is and how it is 

To meet this condition, rates must be raised, wages 
must be kept down, expenditures for the upkeep of 
the property must be skimped. The average annual 
charge for maintenance of way on American railroads 
is $1,500 a* mile. On the St. Louis & San Francisco 
it was only $984 a mile. 

Trains were late, accidents were many, the lives of 
passengers and of employees were endangered. But 
the syndicates reaped their profits and therefore, it 
is to be assumed, the country was safe. 

It certainly was if deals of this kind could save it. 
The St. Louis & San Francisco had, for instance, a 
peculiar contract with the American Creosoting Com- 
pany for the creosoting of its ties, a thing necessary 
to preserve them. Twenty-eight and a half cents a 


tie was the price called for in this contract. Fourteen 
cents a tie was the prevailing price for work of this 
kind. Other roads were ^ble to get their creosoting 
done at that figure. But the American Creosoting 
Company was owned by the Insiders at that time per- 
forming their dizzy stunts with the Rock Island and 
controlling likewise the St. Louis & San Francisco. It 
was a good contract — ^for the Insiders. They had simi- 
lar contracts with the Rock Island and the Chicago 
& Eastern Illinois, other roads that they controlled. 
These also were Good Things— for the Insiders. 

Gentlemen affiliated with and interested in the St. 
Louia & San Francisco were also interested in the 
New Orleans Terminal Company, a corporation own- 
ing and operating terminals, wharves and warehouses 
at New Orleans. The St. Louis & San Francisco had 
no line into New Orleans and no use for any terminal 
facilities there, but it took one-half of the stock of the 
Terminal Company, nevertheless. By this means it 
was assessed $280,000 a year for the Terminal Com- 
pany's interest charges and received only $50,000 a 
year as its share of the Terminal Company's revenues. 

The next chapter in the history of this concern is 
so peculiar and likewise instructive that I think it is 
worth dwelling upon as an example of the realities of 
American railroad managiement with which newspa- 
per eulogy is so busy. 

For many years the Kansas City, Fort Scott & Mem- 
phis Railroad Company had been one of the estab- 
lished highways of the southwest. It was a kind of 
"feeder*' line, feeding principally the St. Louis & San 
Francisco, with which it was rather allied in opera- 
tion. It had never been in itself a profitable venture, 


In 1900 it paid one dividend, 5 per cent on its pre- 
ferred stock. Otherwise it seems to have had a bar- 
ren but hopeful existence. 

In 1901 some eminent gentlemen of Wall Street, 
some of them numbered among the Insiders of the St. 
Louis & San Francisco, organized a new company 
called the Kansas City, Fort Scott & Memphis Railway 
Company for the purpose of buying the Kansas City, 
Fort Scott & Memphis Railroad Company. Observe 
the distinction — ^Railway and Railroad. It is a differ- 
ence often to be noticed in these reorganizations and 
sleight-of-hand feats. Often the only thing changed 
is this tail-end of a name. . In this case the old com- 
pany was Railroad and the new was Railway. . 

The new company proceeded to acquire the old on 
the basis price of $150 a share for the preferred and 
$100 for a share of the common — ^an extravagant price 
for stock in a company with such a record. At that 
time the stocks of railroads regularly paying 5 per 
cent dividends year in and year out were worth in the 
market about par, and yet the preferred stock of this 
unfruitful institution was reckoned in some mysteri- 
ous way to be worth 150. 

Meantime a syndicate of these gentlemen had 
secured practically all of the common and preferred 
stock of the old company. 

The new company, the Railway Company, therefore 
issued to this syndicate in exchange for this old stock 
$11,500,000 of new mortgage bonds to be secured by 
the property of the old company ; also to the same syn- 
dicate $13,510,000 of new preferred stock and 
$15,000,000 of common. 

The St. Louis & San Francisco wa? now induced to 


guarantee these mortgage bonds of the new company 
and to issue $13,500,000 of 4 per cent trust certificates 
in exchange for the new company's preferred stock. 
This made the syndicate practically secure. The 
$13,500,000 of 4 per cent trust certificates thus issued 
by the St. Louis & San Francisco was in effect a new 
issue of stock and with its guarantee of the bonds of 
the new company increased its own capitalization by 

The new issue of St. Louis & San Francisco stock 
and the issue of Kansas City, Fort Scott & Memphis 
bonds were offered to stockholders of the St. Louis & 
San Francisco at about 80. They took less than half. 
The members of the syndicate took the rest. 

The new company (Kansas City, Fort Scott & 
Memphis Railway) then leased itself to the St. Louis 
& San Francisco upon terms richly profitable to the 
syndicate. The St. Louis & San Francisco undertook 
to pay the annual interest charges on the bonds of the 
new company (most of which the syndicate had ob- 
tained) 4 per cent on the preferred stock and all other 

These other charges included some exceedingly 
handsome commissions to the members of the syndi- 
cate, apparently to compensate them for making a deal 
that in itself netted them large profits. Their total 
commissions amounted to $494,894 and their profits 
on the deal to $1,783,207. 

The entire time required for all these precious 
transactions was from June 29, when the new com- 
pany was organized, to August 23, of the same year, 
when the lease was made to the St. Louis & San Fran- 


Cisco— -fifty-four days. Total emoluments in that 
time, $2,278,301. 

One gentleman, who was also a director in the St. 
Louis & San Francisco, secured $590,000 as his share 
of this Good Thing. 

Yet there is a superstition abroad that the making 
of great wealth is difficult and strains the intellect. 

Not when you are on the Inside of a railroad, cer- 

Connected with these operations was some agree- 
ment that the syndicate should build one piece of track 
and repair another. They did these things. So far 
as the Kansas City, Fort Scott & Memphis as a public 
highway was concerned, then, this was the total net 
effect of the operations of the syndicate : 

The mileage of the road was increased 131 miles. 

The capitalization of the road was increased 
$29,900,000, or $229,000 a mile for what was worth 
probably $20,000. 

But the $29,900,000, when all was done, was added 
to the total capitalization of the St. Louis & San Fran- 
cisco, already staggering to its fall under such addi- 
tions. There it formed another reason why the road- 
bed could not be maintained in a state of safety, why 
trains were late, why rates must be advanced, why 
wages must be reduced. 

In May, 1922, the Railroad Labor Board made an 
order cutting the pay of the track walkers, section 
hands and watchmen on this road. 

No order was issued anywhere to secure the return 
of any part of the profits of gentlemen that by the 
methods here described made $2,278,301 in fifty-four 
days — one of them at the rate of $10,925 a day. 

The track-walkers, section hands and watchmen con- 
tributed to the operation of the road and the security 
of the public. 

The Gentlemen on the Inside contributed nothing 
but a load of superfluous capitalization that in the end 
broke the back of the enterprise. 

Some of the trackmen were receiving almost $2 a 

Do not dwell upon that fact, however, for to do so 
is to show that you are a demagogue, an anarchist and 
an Enemy of Society. 

Nevertheless, if you are curious to know what this 
capitalization really is on which rates are based, wages 
determined and for the sake of which the Treasury of 
the United States is raided, the foregoing pages offer 
a fair example. ^ 

About one more such exploit proved all the poor old 
St. Louis & San Francisco could stand. 

The Chicago & Eastern Illinois Railroad had been 
gradually undergoing practical absorption by the 
same interests that controlled and manipulated the 
Frisco. There were only 269 stockholders, of whom 
seventeen held most of the stock. In September, 1902, 
the two properties were consolidated on terms that 
seemed afterward to have been highly suspicious. The 
preferred stock of the Chicago & Eastern Illinois was 
deemed to be worth $150 a share and the common 
$250. In exchange for these at the prices named, the 
St. Louis & San Francisco issued 6 per cent preferred 
stock trust certificates for the preferred and 10 per 
cent common stock trust certificates for the common. 

In, other words, the St. Louis & San Francisco guar- 
anteed 6 per cent dividends to the holders of Chicago 


& Eastern Illinois preferred and 10 per cent dividends 
to the holders of Chicago & Eastern Illinois common, 
and undertook to dig both out of the operations of the 

It was not there to be dug. The Chicago & Eastern 
Illinois had for three years prior to the purchase paid 
6 per cent dividends on its preferred but on the com- 
mon it had paid only 8V^ per cent in 1899, 4V^ per 
cent in 1900 and 6V^ per cent in 1901, and the ugly 
fact was that these dividends had not always been 

The attempt to squeeze this juice out of a thing that 
never contained it resulted in the physical and finan- 
cial wrecking of the property. 

The management cut beloW the safety mark the ex- 
penditures for the road's upkeep. In 1901 the expendi- 
tures for maintenance of way were 21 per cent of the 
total and in 1913 only 16 per cent. The charge for 
depreciation of equipment was cut to a point where it 
became the joke oi the railroad world. It got finally 
down to one-fourth of 1 per cent — ^which meant that 
the management assumed the locomotives and cars 
then in use would last 400 years. 

The end came in May, 1913, when the poor old 
drained and looted thing could go no farther, and re- 
ceivers were appointed for the St. Louis & San Fran- 

These endeavored to patch the wreckage together 
by instituting economies, increasing revenues and di- 
minishing expenses. That meant to get the deficit 
out of the public on one hand and the employees on 
the other. There was no effort to get any of it out 


of the syndicates, committees and engineers of Good 
Things that had brought it to wreck. 

Such is the railroad of the United States, and such 
is its capitalization^ Propaganda tells us that we must 
regard both as sacred. 

Propaganda is a queer bird. 

We used to fall for its outgivings as if they came 
from Sinai. We can continue to fall for them if we 
wish, ^ut we are not obliged to. So far neither any 
law nor any decision of the Supreme Court compels 
us to regard the literature of the railroad press agent 
as of divine origin. 

To show how much receiverships help the public 
about such things we may as well note that on May 
27, 1913, when this old hulk went ashore, the total 
capitalization was $295,633,933, of which $51,364,100 
was capital stock and $244,269,833 was bonds — spiled 
up in the ways I have described. On December 3, 
1920, the total capitalization was $340,887,692, of 
which $57,947,026 was capital stock and $282,940,676 
was bonds. 

First the capitalization is piled up to drive the ship 
ashore and then it is piled up again to get it off. 

The interest on the bonds in 1920 amounted to 
$14,267,109. The total of operating and transporta- 
tion jexpenses, of ^all kinds, including the pay of track 
walkers, section hands and watchmen, was only 

One-half the capitalization was fictitious, fraudu- 
lent or illegitimate. 

For the profits of the syndicates and the Good 
Things of the Insiders rates must be raised and wug^s 


The Hindoo looks with awe and superstitious rev- 
erence upon the White Cow, the sacred emblem of his 

Hitherto the railroad company has been the Sacred 
Cow of America. 

We laugh at the Hindoo's superstition. He has 
much more reason to laugh at ours. 

His reverence for his Cow costs him nothing. Our 
reverence for ours costs us billions of dollars a year. 



A Story of Marvels. 

One hot night in July, a few years ago, I was com- 
ing out of Oakland, California, on the Oregon Express, 
a far-famed triumph of railroad luxury and speed 
that on down-grades sometimes attains to a velocity 
of almost twenty-five miles an hour. As the time had 
not come at which one might reasonably go to bed, I 
was enjoying the pleasures of the standing room that 
the Pullman company generously allows to its guests 
thus situated, when the door of the car suddenly 
opened and a young Englishman thrust in a face 
strongly expressive of astonishment and dismay. He 
was closely followed by a young woman who, I after- 
ward learned, was his sister, and the two were in 
excited conversation. 

"This can't be it, you know," cried he, over his 

"It must be,*' says she. "There's nothing else." 

"But I tell you it's impossible," says he, "quite im- 
posible. Don't you see ? It must be on ahead." 

"Go on, then," says she, wearily, "but I'll wager I'm 
right and this is it." 

They pushed on down the aisle, where the facile 
George was adjusting the last curtain over the last 
luxurious couch provided by the benevolent corpora- 
tion that he serves for a pittance a month. 


In a few minutes the two returned, evidently still 
more perplexed, and the young man said to me : 

"Can you tell me where the sleeping cars are?" 

"This is one of them," said I. 

"What! This?" 


"A sleeping car?" 


"And are they all like this?" 

"As like as peas." 

The young man stood for a moment as one whose 
mind gropes and staggers amid the falling of incred- 
ible mysteries. Then he shook his head slowly and 
said with an air of profoundest conviction: 

"Rummy train! Rum-my train!" 

He asked me where people slept on what he was 
pleased to call "this singular contrivance," and I in- 
ducted him into the arcana of the shelf upon which 
the Pullman company allows us to recline. He asked — 
ah — ^how — ^ah — ^in fact, how did one disrobe, so to 
speak. I said that the practice was for one to stand 
in the aisle and denude oneself until one's sense of 
decency would endure no more and then to finish the 
job in one's berth. He looked upon all this as one m 
whom hope was extinct and then said : 

"GoodGed! OGoodQed!" 

The next morning he made his way, pale and dis- 
traught, into the wash-room, where he joined the line 
of thirteen free-bom Americans that were waiting 
for a chance at the common washbowl in which they 
hoped eventually to slop around and make a noise like 
one performing ablutions. While he waited, with 
objurgations loud and deep he related his experiences. 



It appeared that he and his sister had traveled from 
England to Buenos Ayres, thence by the new trans- 
Andean line to Chile and so north by steamer to San 
Francisco. He had known sleeping cars in his own 
country, and on the continent of Europe and in South 
America, but this was his first experience of our pala- 
tial contraptions that bear that name, and his candid 
opinion of them seemed to choke his utterances and 
threaten him with apoplexy. He described his at- 
tempts to unclothe himself on the downy couch that 
for the modest sum of $9.50 he had rented from the 
Fullman concern. Following my directions, he had 
stood in the aisle and unmade his toilet until he felt 
he could no longer compromise with modesty, after 
which he essayed the rest behind the uncertain protec- 
tion of the curtain. The chief difficulty was his nether 
garments, so to speak. First he lay on his back and, 
elevating his feet, tried to yank his trousers heel- 
ward. Then he sat up and tried to work them off by 
degrees, like a man skinning a rabbit. Then he arched 
himself on the back of his neck and his heels. Then 
he tried one leg at a time, lying first on one side and 
then on the other. Finally, when he had scattered the 
contents of his pockets all about the berth, and worked 
hiibself into a rage and a dripping perspiration, he 
succeeded in getting out of his trousers and was so 
exhausted and breathless that he stopped with this 
achievement and tried to sleep. 

Judging from his account, it must have been an in- 
teresting night for him. Of course, not being provided 
with a jimmy, a crowbar and a stump-puller, he could 
not get the window open. The temperature in the 
Sacramento valley was fiercely torrid; the car was 


suffocating ; and his poignant misery was in no way re- 
lieved by the sharp contrasts in his mind between 
what is called a sleeping car on the pampas of South 
America and what is called a sleeping car in the 
United States. 

I suppose I hardly need to say that in these com- 
parisons the state of civilization and the prevailing 
standard of common decency in my native land suf- 
fered greatly. They always do when foreigners ac- 
quire a good, competent notion of our sleeping car 
system and its complex and manifold barbarities. 

As a rule, nothing else observed of us by our visitor 
from abroad creates such an unfavorable impression; 
even our most sympathetic critic cannot overlook such 
a significance. Let's be frank and own the disgraceful 
fact. It is not merely that the American sleeping car 
is uncomfortable and extortionate; it is so indecent, 
primitive, rural and jay that our mere tolerance of 
a device involving such publicities and promiscuities 
is a reflection on our place among the civilized nations. 
In a mining camp or on a wild western cattle ranch a 
man may endure the necessity of unclothing himself 
in public, but we ought to have passed long ago from 
the mining camp stage of evolution, and even in a 
mining camp no such indignities would be allowed as 
the American sleeping car puts upon women. 

Nowhere else in the world is a woman compelled to 
retire with no more privacy than the shelter of tha 
same curtain that also conceals a man most often a 
stranger to her. Nowhere else is she expected to pa- 
rade half -clad before a car-full of men as she strug- 
gles to get to a dressing-room overcrowded and filthy. 

The whole thing is an abomination. It is as much a 



monstrous parody upon comfort as it is upon the basic, 
requirements of civilized life. In winter you lie in 
your berth and fry upon a gridiron composed of the 
infernal steam-pipes beneath. In summer, if by any 
possibility you can jimmy a window you half -smother 
in dust and cinders. The mattresses are apparently 
stuffed with concrete; the pillows contain croquet 
balls ; the highly suspicious blankets seem to be made 
of wood. The ventilation is invariably atrocious and 
cannot be otherwise. In the morning with fourteen 
other unfortunates you share a wash-bowl in a state 
to produce nausea in every beholder. 

You have paid a high price and had for it the privi- 
lege of reclining certain hours upon a kind of barbar- 
ous shelf. 

Why do we have these things? Other nations do 
not. Why are we singled out for an affliction so gross 
and humiliating? 

The American sleeping car was devised about sixty 
years ago, when much of our civilization was of the 
mining camp order. It was a mere makeshift and tem- 
porary convenience. On night trains railroad passen- 
gers had been accustomed to sit out the weary hours 
in helpless misery. Here was a crude device to enable 
them to recline. You turned two car seats so they 
faced each other. Then you drew forward the bottom 
cushions and slid downward the back cushions and you 
had a kind of a couch. . It wasn't a bed ; it was just a 
rude contrivance on which one could lie for a few 
hours of troubled rest. That was all. In the begin- 
ning and for many years afterward, nobody undressed 
in a sleeping car berth. Passengers merely reclined 
there instead of sitting up. 


After sixty years this primitive and wretched make- 
shift remains Bxnong us unchanged. Other nations 
have sleeping cars that provide not only comfort, but 
privacy and decency. We alone continue to go to bed 
in public after the manner of the mining camp. 

And the reason for this strange fact is still stranger. 

We have these old torturing and abominable things, 
with their beds of concrete and all the rest of their 
atrocities, because they are an integral part of the rail- 
road flim-flam to which we have submitted with such 
phenomenal patience all these years. We have them 
because certain gentlei^en have succeeded with them 
in eclipsing all records in the trick that has piled the 
great fortunes and impoverished the masses. 

They have Capitalized the Patience of the American^ 

A corporation called the Pullman Company has ex- 
clusive contracts with most of the railroads of this 
country to furnish a sleeping car service. 

The Pullman Company owns the cars. The railroad 
companies haul them to and fro. They are very heavy 
cars. They grind the tracks ; they strain the bridges ; 
they cost much in fuel. The railroad companies haul 
them, heat them, to some extent repair them, some- 
times light them, and employ clerks to sell the tickets 
for them. And they do all this that the Pullman Com- 
pany may gather unexampled profits from a very bad 
service. And still certain minds among us assure us 
that the private management of our public utilities 
represents the summit of efficiency, economy, and pub- 
lic welfare. 

These are but glimpses at the activities of this mar- 
velous concern. No other such gouging, proSt-mak« 

TfiE pulLmaK company ^69 

ing, money-grubbing institution exists in all this 
world. The fulf story of its impudent career reads 
like some romance of imaginary imposture, reveals us 
as nationally duplicating the exploits of Simple Simon 
or Goldsmith's Moses at the Fair, and suggests as an 
appropriate national emblem the Woolly Horse. 

Some of the overshadowing and menacing fortunes 
of our happy land have been optimistically excused on 
the supposition of some invention or improvement or 
some service to mankind. No beaming optimist can 
imagine any such excuse in the Pullman story. It is 
just plain bunk. George M. Pullman never invented 
the sleeping car nor the berth in it nor anything else, 
and of course he never created anything. The idea of 
collapsing two car seats into a couch was first hit upon 
by a poor carpenter in Chicago, who died penniless and 
unknown. Pullman surmised that under certain con- 
ditions and with a certain kind of co-operation of 
which you are to hear later, the thing might be made 
to pay well, and he orga^ized a company with $100,- 
000 capital to operate cars with these collapsible seats. 
That was all. 

Out of this investment and out of what Samuel Hop- 
kins Adams calls the "cynical tolerance of this public" 
has grown a corporation with $120,000,000 of capital 
that has made more money on a smaller service ren- 
dered and more money on a smaller risk and a smaller 
original capital than anj' other corporation that ever 

From the beginning there was no reason on earth 
for this corporation, since no reason existed why rail- 
roads should not operate cars for people to recline in 
exactly as they operated cars for people to sit up in. 


To overcome this natural difficulty that confronted 
the business at the outset, influential railroad directors 
were enabled to possess, on very attractive terms, cer- 
tain quantities of sleeping car stock. After that the 
sleeping car company found it easy to make exclusive 
contracts with the railroads in which thede directors 
were influential. 

In blunt words, the thing was graft, pure and sim- 
ple. It was like the express companies, only worse. 
It was like the old Red Line and Blue Line and White 
Line, the old fast freight artifices that used so to 
thrive until public attention caused them to dry up 
and blow away. It was like the Melon Graft and the 
Leasing Game and the Reorganization Trick. It was 
chiefly a device by which the public could be compelled 
to pay more money that could be quietly and under a 
convenient disguise diverted into the coffers of the 
Gentlemen on the Inside. 

The sleeping car increased the toll collected; the 
distribution of stock assured the Gentlemen that the 
increased toll should takfe the proper direction. 

At first and for many years these contracts made in 
this way were of the most extraordinary character. 
The railroads not only hauled the cars for nothing, but 
they actually paid for the privilege. They paid 4 
cents a mile for hauling a sleeping car and 3 cents a 
mile for hauling a parlor car. The railroads received 
no revenue from these cars, but the directors that 
made the contracts received much. 

The Pullman Palace Car Company, the original of 
the present concern, was incorporated in Illinois in 
1867, and for the next eight years operated discreetly 
without leaving any public record of its skillful work. 


In 1875 it was for the first time obliged to file a state- 
ment about itself, and even then the information was 
meager. But in 1879 it came coyly into the limelight 
and^the fact was disclosed that it had by that time a 
capital stock of $5,938,200, on which 8 per cent divi- 
dends were being paid. How much of this capital 
stock represented anything more than graft, grati- 
tude and good wishes, nobody knew, but the actual in- 
vestment' represented was plainly small. In 1875 and 
again in 1878 the company had redeemed from earn- 
ings bonds amounting in all to $875,000, which would 
indicate that beside making 8 per cent dividends the 
company was piling up an annual surplus of a com- 
manding size, which, indeed, has been its practice ever 

1881. A new stock issue of $2,000,000 at par to 
stockholders. Market price, 145. Melon, $900,000. 
And the dividend that year was 9V^ per cent. Fore- 
sight is indeed a great thing.-* Some of these directors 
that had presents of stock plunked down upon them 
were almost sure they had a good thing, and now you 
see they were right. 

1883. Issued $1,326,000 of new stock at par to 
stockholders. Market price, 126. Melon, $344,760. 

Later in the same year issued $1,327,000 of new 
stock at par to stockholders. Market price, 117. 
Melon, $225,000. 

No question that this was a Good Thing. 

1886. Got $1,067,412 for its holdings of West 
Shore securities, which it had bought from earnings, 
and gathered in $1,500,000 of bright new bonds issued 
for car equipment by various railroads, showing us 


where the money goes that we pay in interest on these 
equipment trust notes. 

1887. Issued $4,000,000 of new stock to stockhold- 
ers at par. Market price, 159. Melon, $2,360,000. 
Speaking of Good Things, this would seem to be with- 
out a flaw. 

1889. The Pullman I^alace Car Company now took 
over all of the other sleeping car companies in the 
country, except the Wagner (Vanderbilt concern), and 
issued $5,000,000 of new stock to stockholders at par. 
Market price, 200. Melon, $5,000,000; or as much as 
the stock itself. 

All these years the company was paying from 8 to 
914 per cent a year in cash dividends. 

To these years also belongs an odd little incident 
that may illustrate what this enterprise really is. 

One of the companies absorbed (at public ex- 
pense), as above noted, was the Mann Boudoir Car 
Company, which operated the only sane and reason- 
able sleeping car that had ever been used on American 
railroads. Its inventor recognized some of the founda- 
tions of a state of civilization by providing closed com- 
partments instead of open berths. The introduction 
threatened the Pullman supremacy because if the pub- 
lic once became aware of the advantages of the Mann 
car it would, in all probability, never again be satis- 
fied with the hot gridirons and poor crudities of Pull- 
man. When the consolidation took place, therefore, 
the Mann cars were withdrawn. 

The railroads of New South Wales, in Australia, 
are owned by the state, and not long after this the gov- 
ernment of New Soutii Wales was looking about for 
a service of sleeping cars. Its agents came to America 


and bought up all the Mann cars, and, as these were 
not enough for the requirements, also bought several 
cars of the regular Pullman pattern. These were 
shipped to Sydney and put into operation, both styles. 

But the Australian people made such savage com- 
plaint about the indecencies and discomforts of the 
regular Pullman cars that after a short time the gov- 
ernment withdrew them and rebuilt them after the 
Mann pattern. And today an American traveling in 
Australia may ride in the comfortable and convenient 
sleepers that were built for his own country and 
shipped hence because they threatened to interfere 
with the graft of the Pullman Company and its great 
dividends paid on watered stocks. 

1891. Issued $5,000,000 of new stock at par to 
stockholders. Market price, 196. Melon, $4,800,000. 

1898. Issued $6,000,000 of new stock at par to 
stockholders. Market price, 200. Melon, $6,000,000. 

This brought the total capitalization to $36,000,000 
and marked the last occasion on which any money 
was to be paid into the concern for any stock issue. 
In eighteen years melons (that we know of) had been 
cut for the fortunate stockholders to the amount of 
$20,508,000 and meantime no year had passed with- 
out its 8 per cent dividends. 

1894. And now the gracious prospect was suddenly 
clouded from an unexpected quarter. Year in and 
year out the workers that had built the cars, made 
possible all the melons, and created all the wealth, had 
gone along and gathered from the enterprise just 
enough to keep them alive and had made no complaint. 
They now manifested themselves in a way that com- 


pelled attention, and out of their protests came one of 
the historic industrial uprisings of America. 

To make this clear, I must diverge a little from due 
chronological order. 

The Pullman company had early begun to manufac- 
ture its own cars. After a time, as its capital swelled 
and its profits piled up, it was driven to wider activi- 
ties and began to manufacture cars of all kinds for 
other concerns. To this end it bought a great tract 
of land in what is now the southern part of the city 
of Chicago and established there around a great fac- 
tory the famous model town of Pullman, where philan- 
thropy and dividends went hand in hand to an extent 
seldom seen elsewhere. 

Mr. Pullman, desiring to show to the world that he 
was indeed a kind and indulgent employer, provided 
for the "hands" of the company a library, a theater, 
and other attractions to which persons of his class 
pointed with swelling pride. Meantime the company 
trimmed these "hands" to the king's taste. Practi- 
cally speaking, they could live only in the houses that 
the kind, indulgent company had erected for them so 
badly that the roofs leaked and the door posts fell 
apart. These abodes were rented at extremely profit- 
able rates. The "hands" also obtained of the com- 
pany their gas and water, and in effect about every- 
thing else that they bought, and all this offered a field 
for business advantage of which the kind, indulgent 
company cheerfully availed itself, to the benefit of the 
melon patch, the dividends, and the building of their 
own gracious residences in a style quite different. 

In the midst of this goodly business, when the com- 
pany was operating one of the best melon gardens in 



the world (up to that time) and had a surplus of $25,- 
791,645 Teady to divide among its stockholders, it an- 
nounced that because of the hard times following the 
panic of 1893 changes equivalent to reductions in 
wages were imperative. 

Whereupon a strike followed. The employees felt 
that a reduction of wages in addition to £dl the other 
impositions practised upon them, was more than they, 
as good, patient Americans, were called upon to en- 

This was received by Mr. Pullman and his caste as 
conclusive evidence of the ingratitude of the working 

They had not counted upon some other results of 
this strike. There was in existence at that time a re- 
markable organization called the American Railway 
Union and to support the strike of the insurgent 
Pullman "hands" this union declared a strike upon 
every railroad that hauled Pullman cars. Two hun- 
dred thousand railroad workers responded to the call, 
and before they could be defeated and driven back to 
their work it was necessary for President Cleveland 
to call out the United States troops (against the pro- 
test of the Governor of Illinois) and for agents of the 
railroad companies to burn some scores of freight cars 
that public opinion might condemn the strikers for 
acts of violence they never committed. 

This was not all. The strike disclosed the facts 
about the model town of loot, and the attorney-general 
of Illinois brought suit to determine by what right 
the Pullman Company was also a landlord and a gas 
factory and a waterworks and several other things es- 
sential to its plans of charitable thrift in the model 


town. The eventual result of which was a decision 
that the company had no such rights, the loss of the 
humane gouging apparatus at lovely Pullixian, and 
sterile years in the melon patch from which the poor 
but deserving stockholders had carried such luscious 

1898. All was by this time well once more with this 
famous enterprise. A surplus of more than $25,000,000 
had been accumulated and the company now proceeded 
to distribute it among the stockholders by declaring 
first a cash dividend of 20 per cent in addition to the 
regular dividend of 8 per cent, and then a stock divi- 
dend of 50 per cent. 

The cash dividend took care of $7,200,000 of the 
surplus and the stock dividend consumed $18,000,000. 

This brought the capital stock up to $54,000,000. 

The stock dividend had still another purpose than 
the distributing of the surplus. 

For some years now the sleeping car business of the 
country had been possessed chiefly by two companies. 
A few railroads like the Chicago, Milwaukee & St. 
Paul and the Great Northern operated their own cars 
for night use as well as day, but the rest were paying 
tribute to either Pullman or Wagner. The Pullman 
was now owned largely by Marshall Field and other 
JVestem Interests. The Wagner was an instrument 
of the Vanderbilts and served as one of the means by 
which they concealed and gathered the egregious prof- 
its of the New York Central system. Both companies 
existed for no purpose or reason except as parasites 
upon railroad operation to absorb railroad income. 
The few railroads that were outside of the influence 
of the Pullman and Wagner graft were daily demon- 


strating that a railroad could operate its own sleep- 
ing cars much better than an outside corporation could 
operate them, but the significance of this demonstra- 
tion passed unheeded by the public that eventually 
paid the graft. 

Talk of the consolidating of the Pullman and Wag- 
ner concerns had been going on for years. Competi- 
tion between them, at one time strong, had come to an 
end. In earlier years, George M. Pullman had heavily 
backed the West Shore Railroad as a means of break- 
ing the Vanderbilt monopoly and putting his cars 
into competition with the Wagner cars between Chi- 
cago and New York, but thereafter the fields of the 
two corporations became well defined and they^ went 
forth in harmony to pluck the public. 

But as the great Interests back of each were stead- 
ily drawing together, consolidation was seen to be in- 
evitable, and both began early to prepare for it. The 
Wagner was organized (for purposes of safety in its 
operations) as a voluntary association under the laws 
of New York. It had $13,000,000 of capital stock on 
which were no quotations as none of it was in the mar- 
ket ; it was paying 8 per cent dividends, the same rate 
that the Pullman paid. 

As a preliminary step to consolidation, the Wagner 
company issued first, $6,000,000 of additional stock 
to its stockholders at 30. This stock was worth at 
least 175 ; therefore this was a melon worth $8,700,000 
and equivalent to voting that sum into the pockets of 
the Vanderbilts. A little later came an additional is- 
sue of $1,000,000, for which it appears nothing was 

This brought the capitalization of the Wagner up to 


$20,000,000 on which dividends continued to be paid 
at the rate of 8 per cent yearly. 

Meantime, as we have seen, the Pullman artists on 
their side had not been idle. In preparation for the 
consolidation deal they had been issuing water until 
they had brought their capitalization up to $54,000,- 

On this watered capital the Pullman dividend, "in 
deference to public opinion," was reduced from 8 to 
6 per cent. 

"Public opinion'*^ must have been a powerful old 
girl in those days. At 8 per cent on $36,000,000, the 
old capital, the total dividend would have been $2,880,- 
000 and at 6 per cent on $54,000,000, the new capital, 
the total dividend was $3,240,T)00. But powerful as 
"public opinion" is thus shown to be, its influence 
lasted but a year, after which the old rate of 8 per 
cent was resumed. 

All was now ready for the consolidation deal, and 
in 1899 the directors of the two companies voted it and 
the glad stockholders ratified it (as well they might), 
with pleasure upon their countenances. The thing 
was simple as well as efficacious. The Pullman Com- 
pany merely issued $20,000,000 of additional stock and 
exchanged it dollar for dollar for the $20,000,000 to 
which the Wagner capitalization had been so success- 
fully watered. 

This brought the Pullman capitalization to $74,000,- 

The name of the consolidated company was now 
changed to the Pullman Company. 

This happened with the end of 1899 and the new 
concern started in to do business — and the people. 


By 1905, that is to say, in five years, by diligent ap- 
plication to this occupation and the principles of suc- 
cess, the company after paying annual dividends of 8 
per cent on all this watered stock, had accumulated a 
surplus of $22,151,946. One year later this had be- 
come $27,122,020, showing that the surplus was accu- 
mulating at the rate of $5,000,000 a year, which was 
equal to about 10, per cent on all the money even pre- 
tended to have been paid into the concern, to say noth- 
ing of the 8 per cent dividends upon a capitalization 
more than half of which was pure water. 

But as I have labored to show in a fore-going chap- 
ter, a surplus may be an embarrassing thing if it is 
allowed to go too far. Reason in all things is a maxim 
that applies even to surpluses gouged from the public. 
To take care of this surplus, the company voted on No- 
vember 14, 1906, a stock dividend of 36 per cent, in 
addition to the regular cash dividend of 8 per cent. 

This watered the stock by $26,000,000 to $100,000,- 

On this capitalization, about three-fourths of which 
was limpid water, the company continued to pay 8 per 
cent dividends and to accumulate a surplus as before. 

If one man had owned the entire concern from the 
beginning his annual income from it would now be 
greater than all the money he ever invested in it. 

In the next four years the surplus had reappeared 
and grown to about $20,000,000, showing that in spite 
of the increase in the capital stock, the earnings of 
the concern were still running ahead of the dividends 
at about the same old rate of $5,000,000 a year. 

On March 21, 1910, a new stock dividend of 20 per 
cent was announced, to take up the accumulated sur- 


plus. In addition to the usual 8 per cent cash divi- 

This brought the capitalization to $120,000,000 and 
it may be doubted if as much as $20,000,000 of this 
represented anjrthing but water. 

In nineteen years the Pullman company had distrib- 
uted among its stockholders $64,000,000 in stock divi- 
dends and paid 8 per cent a year in cash even on these 
stupendous waterings. Counting cash dividends and 
all, this is at the rate of 17 V^ per cent a year on the 
capital as it was in 189S and without considering the 
fact that what was 8 per cent in 1893 was 24 per cent 
in 1912. And since 1898 not one cent had been in- 
vested in the enterprise. 

In 1893 the annual amount that niust be wrung 
from the public to make up the dividends was $2,880,- 
000. In 1912 it was $9,600,000. And not a cent in- 
vested meanwhile. 

On the other side of this account the public has had 
all these years, the most abominable and indecent 
transportation service in the world. 

Suppose that from the beginning there had been in 
this instance also a reduction of rates, step by step, as 
the profits went beyond a reasonable compensation for 
the service performed. 

Our sleeping car service would look very different 
today, wouldn't it? 

Between Chicago and New York you could have a 
room to yourself with a bed instead of a shelf and with 
full toilet accessories, and you could have it for $8 in- 
stead of the $9 that you now pay for misery and the 
gridiron. And the company could furnish these and 
provide steel cars and still pay 10 per cent dividends 


on the watered capitalization of 1893, equal probably 
to 35 per cent dividends on all the money ever invested 
in the enterprise. 

For the fact that you do not have the comfort and 
you do have the misery and the imposition is no ex- 
planation except the golden palaces of the gentlemen 
that own this wonderful money mill. For the sake of 
their private fortunes and for nothing else you endure 
the tortures of the grilling shelf, attempt the weird 
athletic feat of dressing while lying down, stand in 
line at the wash bowl, and pant and gasp all night in 
the vitiated atmosphere of a close sealed cave. 

The true function of the Pullman Company, how- 
ever, should not be overlooked. It is not to provide us 
with facilities for repose on our journeyings, which 
it does badly, but to furnish additional means to con- 
ceal railroad profits, and this it does remarkably well, 
as the foregoing facts will be found to demonstrate. 



A. The Hocking Valley Case. 

We neeed not hesitate to believe that such perform- 
ances as we have been studying in the History of the 
American Railroad are morally wrong, no matter 
whose fortune they may build up nor with what face 
they may be carried off. 

The courts have said so whenever they had a chance. 
Custom has made Wall Street indifferent, as a rule, 
to the manner in which wealth is had. To Get It is 
the main thing. Yet there are railroad deals of this 
character at which even Wall Streeet, in its cynical 
cold way, has muttered protest. 

Such an instance we are now about to relate. Also 
as another illustration of the true nature of the rail- 
road capitalization of tlie United States on which div- 
idends and interest must be provided by freight and 
passenger rates and by keeping down the wages of 

I suppose few of us whose memories go back so far 
will need to be told that twenty-five years ago the rail- 
road system of the United States, which is now con- 
trolled by a few men, consisted of hundredsM)f separ- 
ate properties, some of them exceedingly small and 
quite independent. 

Three of these little lines, the Columbus & Hocking 


Valley, the Columbus & Toledo, and the Ohio & West 
Virginia, existed in 1881 in the coal region of Ohio. 

Henry B. Payne, Chauncey H, Andrews, Jeptha H. 
Wade, and three other Ohio capitalists united with 
one Stevenson Burke in a scheme to combine and pos- 
sess these properties— and others. Henry B. Payne 
was one of the controlling powers in the Standard^ Oil 
Company, from which he had drawn a large for- 
tune, and was the father-in-law of William C. Whit- 
ney. He has also a kind of fame in Ohio and elsewhere, 
through the charge brought against him that he pur- 
chased his seat in the United States Senate, and for 
other reasons not necessary to discuss here. The other 
members of the pool were rich, but not so rich as Mr. 

Included in the property of the three little railroads 
were some coal lands, and coal lands are always good 
to have. The gentlemen of this pool earnestly desired 
to have the coal lands as well as the railroads. Pres- 
ently they found themselves in possession of the coal 
lands, the railroads, and other good and valuable 
things, and without expending a cent therefor, or per- 
forming any labor, or making any effort, or returning 
any equivalent, and yet without risking the peniten- 

First, the seven eminent gentlemen forming the pool 
executed twenty-four separate notes, aggregating $6,- 
000,000. These notes Mr. Burke took to New York, 
where they were discounted by the banking firm of 
Winslow, Lanier & Co. acting with Drexel, Morgan 
& Co. and the Central Trust Company. With the 
funds thus secured the pool bought the three little 
railroads and the coal lands appertaining thereto, 


The railroads they consolidated into the Columbus, 
Hocking Valley & Toledo, a name long and odorously 
familiar in railroad history, and the coal lands they 
reserved for other purposes. 

Having thus secured control of the property, the 
gentlemen issued upon it $14,500,000 of 5 per cent 
bonds, whereof it was announced that $6,500,000 were 
required to take up the outstanding obligations of the 
three little roads, and the remaining $8,000,000 were 
to be used for needed improvements, such as laying 
double track and increasing the equipment. At least 
this was the plain declaration of the resolutions of the 
directors authorizing the bonds and of the mortgage 
on which the bonds were based. Of the $14,500,000 
bonds thus issued, $6,500,000 were duly used to pay 
off the existing obligations of the three little roads, 
but for a good and sufficient reason there was no 
double-tracking, there were no other improvements. 

The gentlemen in the pool had utilized the coal lands 
that went with their purchase to organize another cor- 
poration — ^the Continental Coal Company. They now 
exchanged the stock of the Continental Coal Company 
for the $8,000,000 that still remained of the newly is- 
sued Columbus, Hocking Valley & Toledo bonds. With 
$6,000,000 of the bonds thus secured, they paid off the 
twenty-four original notes that had been discounted 
by Winslow, Lanier & Co., Drexel, Morgan & Co., and 
the Central Trust Company. There was left $2,000,- 
000 of the bonds, which they divided among them- 

Their balance-sheet then showed an investment of 
nothing, capital nothing, expenditure nothing; net 
profits, a railroad system and $2,000,000r— which 


might be termed fairly remunerative work and shows 
how liberally we Reward Industry. Net profits/ 
$2,000,000 and ,a railroad, for the labor of signing 
twenty-four pieces of paper. But perhaps this seems 
to you an excessive guerdon for the toil involved. In 
that case I invite you to consider* what the railroad 
press agent calls the Services to Society, which will 
presently, I hope, be apparent. 

The next chapter of the story introduces two addi- 
tional characters. So evanescent is the glory of poli- 
tics that I suppose not many men can now of a sudden 
find in their memories the face and fame of James J. 
Belden, of Syracuse^ yet of old time he was a great 
figure in New York State and national politics and in 
that peculiar and unillumined borderland where poli- 
tics and business fare hand in hand. "Jim" Belden, 
he was called; a smooth, suave, resourceful gentleman 
of a varied, sometime^ picturesque, and usually suc- 
cessful career. 

Mr. Thomas F. Ryan of Wall Street knew him well 
and he knew Mr. Ryan ; they had reason to know each 
other, having some interests in common and very 
likely some sympiathetic views. In 1889, it occurred 
to one of them, which one I do not know, that all the 
good things were not exhausted from Columbus, Hock- 
ing Valley & Toledo. Wall Street knew pretty well the 
operations of the Burke Syndicate and generally be- 
lieved theni to be questionable. Not because they dif- 
f erred in their essence from one hundred similar trans- 
actions by which great fortunes had been built, but 
because in this instance the thing had been done too 
boldly and with a brutal candor repulsive to good taste. 
Wall Street did not interfere with the achievement. 


because such is not its way, but it held the game to 
have gone too far and to be subject to investigation 
by the courts. Mr. Ryan and Mr. Belden must have 
become inoculated with this view. Mr. Belden went 
out into the Street and bought $60,000 of the Colum- 
bus, Hocking Valley & Toledo bonds. 

Then he suddenly brought suit against Stevenson 
Burke, Winslow, Lanier & Co., Drexel, Morgan & Co., 
the Central Trust Company and others to compel the 
return to the railroad's treasury of the $8,000,000 in 
bonds that had gone to pay off the syndicate's twenty- 
four notes and had otherwise been used for the benefit 
of the pool. 

In advance of the bringing of this suit, Mr. Ryan 
had gathered all his available means, and very quietly, 
as was his wont, he had laid in the stock of the rail- 
road. It looked like a Good Thing, because there was 
no doubt that the original transaction was essentially 
dishonest, and if the courts should so decide, the $8,- 
000,000 would have to be returned to the treasury of 
the Columbus, Hocking Valley & Toledo (where it was 
badly needed), and the stock of that railroad would 
certainly go soaring. At the time the stock was inert 
and the price very low, for the load of bonds placed 
on the property by the Payne-Burke pool had almost 
broken the road's back, and all it could squeeze, gouge, 
and trick from the patient public (which in every case 
pays for these amusements) could hardly provide the 
fixed charges. So with cheerful heart,, no doubt, Mr. 
Ryan bought heavily. So did Mr. Belden — quietly, 
always quietly. 

Winslow, Lanier & Co, bitterly fought the suit. On 
each side was a great array of counsel. After pro- 


found argument, Judge Ingraham, who heard the suit, 
rendered a decision that, while not regarded as deter- 
mining definitely all the points at issue, ruled essenti- 
ally against Belden and Ryan. The ground on which 
Judge Ingraham based his decision was chiefly this, 
that the money the plaintiff sought to recover had 
never been in the possession of the railroad company, 
but had been appropriated by certain members of the 
pool to their own uses. Hence it was not covered by 
the mortgage and hence it was no concern of Belden's, 
whose claim was based upon the mortgage and upon 
nothing else. 

On appeal from this finding, the old General Term 
Supreme Court, State of New York, practically sus- 
tained Judge Ingraham, though it severely denounced 
the actions of Burke and his associates. It excluded 
from any liability the banking firms from which Bel- 
den and Ryan expected to recover and restricted their 
action to Stevenson and Burke, who probably had no 
such sum of money. 

The case then went to the Court of Appeals. 

But now a very strange thing happened and one for 
which there has never been any adequate explanation. 
To this day it remains among the historic mysteries 
of High Finance. Just before the Court of Appeals 
handed down its decision in the case, there came se- 
cretly from Albany a definite rumor that the findings 
below would be reversed and that the majority opin- 
ion would be for Belden — and Ryan. I may say that 
it is not usual for advance information to leak out con- 
cerning a decision by the Court of Appeals of the State 
of New York ; not usual and not proper. As a rule, the 
decisions of this, the most solemn and august court in 


Ihe State, are an inviolable secret until they are otR- 
daily promulgated. But in this case Mr. Ryan seems 
to have believed that he had news of the impendiiig 
decision, news that he, njost careful and deliberate of 
men, felt that he could not doubt; and thus secure in 
his ability, energy, and foresight, he bought more and 
more of the stock, standing to make enormous profits 
on the advance that was to be. 

But when the decision came out, lo, it was against 
him ! Tlvat Burke and his companions had looted the 
Columbus, Hocking Valley & Toledo of $8,000,000 of 
bonds the decision clearly admitted; but it held that 
since Belden had bought his bonds with a full knowl- 
edge of all the facts, and subsequent thereto, and had 
bought them for the sole purpose of bringing the suit, 
he was not entitled to recover. Somebody else might 
be so entitled, but not Belden. 

Something about the decision always seemed baffling 
and unsatisfactory. It was not signed by all the 
judges and a story was circulated and eventually 
printed that the judgment handed down was not the 
judgment of the majority, that the advance report Mr. 
Ryan received of the decision was at the time well- 
founded, and that the opinion rendered was really the 
opinion of a dissenting minority of the court. 

All this helped Mr. Ryan nothing. His ability, en- 
ergy, and foresight had gone astray; there was no 
rise of Columbus, Hocking Valley & Toledo stock, no 
magnificent coup, no millions seized in a day. On the 
contrary, he saw the ship of his fortunes driving 
toward a lee shore, and it was only by a changing wind 
that he could work off. 

As to the plundered Columbus, Hocking Valley & 


Toledo, according to all precedent and all the logic of 
the situation, that, being a poor staggering concern 
overloaded with loot bonds and such things, should 
have gone to a receivership. But in the course of time 
there came a business revival through the country re- 
sulting in an increased demand for coal, and the 
wretched thing managed by sheer good fortune to sus- 
tain itself. Years afterward Mr. Ryan hooked to it 
some more railroads similarly broken-backed, blan- 
keted these (if you will believe me) with more of the 
nifty mortgage, and in the end sold the whole curio 
collection at a profit — a consummation characteristic 
of the other side of fortune-making, which consists of 
mere luck. 

But as to the light in which the courts view these 
performances, which was the moral we started with, 
I cite these condensations from the scalding opinion of 
the General Term, reviewing the methods of Burke 
and his assoociates. The court found that these meth- 
ods were chiefly as follows : 

1. Purchasing stocks of other railroads and get- 
ting bankers to advance money on them by which the 
control of the roads was secured without further ex- 

2. Buying contiguous coal and other lands at less 
than their actual value and selling them to the com- 
pany at a large advance. 

3. Issuing the $14,500,000 of bonds for a specified 
purpose and then using $8,000,000 of the bonds for 
another purpose, namely, to redeem the notes given to 
Winslow, Lanier & Co., for the benefit of Burke and 
hi^ associates, 


4. Causing the company to mortgage all its prop- 
erty to support these bonds. 

5. Concealing the use really intended to be made 
of these bonds and misrepresenting it in the covenant 
declarations of the mortgage. 

All these actions the court held to be utterly wrong. 
How they could be wrong in this instance and right 
in the hundreds of other instances in which they have 
been used, will puzzle the ungifted mind to discern. 

But what is still more important for us to remember 
is that all of the fictitious capitalization thus created 
by Mr. Burke and his associates is still in existence and 
still collecting tribute from us. 

In the end the poor old Hocking Valley was absorbed 
by the Chesapeake & Ohio, and in the gigantic capi- 
talization of that system you will find the full results 
of Mr. Burke's ingenious scheme of sudden wealth. 
It is part of that total capitalization that forms the 
basis of passenger and freight rates for the public and 
wages for the railroad employee. 

When in 1922 the Railroad Labor Board cut the pay 
of track walkers and section hands it said that these 
cuts were necessary to enable the railroads to get upon 
their feet. 

What it meant was that they were necessary to en- 
able the railroads to make profits on capitalization 
piled up in ways of which Mr. Burke's exploit was an 

B. Samples from a Fruitfvl Field. 

The tricks that have been played with the Erie Rail- 
road have passed into history if not into proverbs. 


Many persons that know nothing about similar 
stunts with other properties have a fair notion of the 
things Jay Gould and Daniel Drew did with Erie. 
They may never have thought of the price they have 
paid for these tricks but they know in a general way 
that by these devious means was laid the foundation 
'of the Gould fortune. 

In the foregoing pages, if I have told the story right, 
it must be apparent that Jay Gould was not more un- 
scrupulous than other men in the manipulating of rail- 
road securities but only more celebrated. 

For these reasons it does not seem to me necessairy 
to go deeply into the history of Erie, since it is in every 
library in the brilliant accounts of Charles Francis 
Adams and others, but only to tell typical incidents 
that fit neatly into what we have been saying on this 
subject of the origin of the capital on which rates are 
based and wages determined. 

In 1880, the Erie Railroad Company, then known' 
as the New York, Lake Erie & Western, borrowed cer- 
tain sums of money to buy locomotives. 

The cost of the locomotives was therefore added 
to capital accounts They became part of the bonded 
indebtedness of the railroad on which interest charges 
must be met from passenger and freight rates. 

They ought not to have been added to capital ac- 
count, because they were to take the place of old loco- 
motives that had been worn out and discarded. They 
were therefore renewals. 

But the money wsts borrowed and the charge made 
and every year the interest, dug out of the public by 
means of rates, was paid on the bonds that represented 
these machines. 



Not a trace of the locomotives is now left to glad- 
den the human eye, but the charge is still there, the 
indebtedness remains exactly as in 1880, and every 
year income must be had to meet the interest charges 
on locomotives that no longer exist. 

Not only so, but it is safe to say that meantime two 
other locomotives have been provided in the same way 
to take the place of each of the locomotives of 1880; 
tliat these in turn have disappeared and that on these 
also we are paying annually the interest charges. 

In the course of time we shall be paying an annual 
interest charge upon dead and decayed equipment 
much larger than the value of all the equipment that 
actually exists. 

I cite this as but one of the eccentricities of the 
American railroad system and one of the curses we 
brought down upon ourselves when we allowed it to 
assume another relation to us than that of a public 

The wise people of France have made no (Such 
blunder. A French railroad company operates a high- 
way as the agent of the people to whom after a term 
of years all the property of the railroad reverts. 
Meantime the capitalization of the company must be^ 
diminished as the value of its equipment declines with 
years and use. 

With us it is exactly the other way. We allow capi- 
talization to be increased in proportion as the evi- 
dences of value disappear. 

The Erie, which ought to be one of the most profit- 
able railroads in the world, has been a lame and limp- 
ing concern almost sixty years. It is an example of 
the cost to the public of these private railroad for- 


tunes, for it has never recovered from the lootings to 
which it has been subjected and never will recover 
from them so long as it continues in private hands. 

More than a generation ago the Gentlemen on the 
Inside of Erie, the men that controlled and manipu- 
lated it, thought they saw a good safe way to a fat 
profit and they sold the stock of the road short; that 
is to say, they bet on the stock market that the price 
of Erie would decline. 

Having made this bet, the more the stock declined 
the more they would make. Erie was then selling at 

The road had 28,000 shares of stock in its treasury 
that had never been issued and $3,000,000 worth of 
bonds that were convertible into stock. 

Being in control of the company, these Gentlemen 
took the 28,000 shares and the $3,000,000 of bonds and 
put them up with one of their number as collateral for 
a loan of $3,500,000 — ^a loan to the company. 

This man then took his collateral (the , convertible 
bonds being the same as stock) and of a sudden threw 
it all upon the market. 

Down went the price of Erie from 95 to 50. 

Whereupon, of course, the Gentlemen made a huge 
killing. In two days they scoped in $10,000,000 to 

But they had added to the Erie's capitalization $2,- 
800,000 of shares and $3,000,000 of bonds, and that 
$5,800,000 of capitalization is still there. It is part of 
that monstrous and staggering total of $421,635,952 
under which this enterprise is oppressed. On the 
bonds alone there has been collected from us in annual 
interest charges made up of freight and passenger 



rates, $8,000,000 or nearly three times the face value 
of the bonds when they were issued. 

On this gresA capitalization it is impossible to keep 
up the interest charges and likewise the equipment. 
Hence the equipment was neglected, with the result 
that in 1922 railroad workers were informed they 
must accept a reduction in pay that this and other 
similarly wrecked railroads might be placed ''again 
upon their feet." 

Some time before this pleasing incident, the Gentle- 
men on the Inside of the Erie had gone to the New 
York legislature and had a bill passed that authorized 
any railroad to issue its stock in exchange for the se- 
curities of any other railroad that it had leased. 

This was a very innocent looking measure. Many 
persons did not see the least harm in it, and many 
others, of course, did not know what it meant. 

The Gentlemen on the Inside knew ,what it meant, 
all right. They were not having laws passed for noth- 
ing — a remark that is probably true in either appli- 
cation of it. 

The next thing they did was to reach out and ob- 
tain for an expenditure of $250,000 a bit of junk rail- 
road called the Buffalo, Bradford & Pittsburgh. It 
was 25 miles long and belonged to the order of tri- 
daily railroads. That is to say, they ran a train on it 
one day and tried to run one the next. 

The Gentlemen now issued $2,000,000 of bonds on 
the Buffalo, Bradford & Pittsburgh railroad, making 
one of their own number trustee thereof. 

Next they leased the Buffalo, Bradford & Pittsburgh 
to the Erie for 499 years. 

Next, sitting at the came table as directors of the 


Erie they confirmed the lease, the Erie assuming and 
guaranteeing the bonds. .Then they adjourned as di- 
rectors of the Erie and, still sitting at the same table, 
divided the plunder. 

Two millions of 7 per cent bonds, now guaranteed. 

For a long time this little deal cost the public $140,- 
000 a year in the interest on these securities. 

The interest has since been reduced, so that the 
charge on the deal is now about $100,000 a year in- 
stead of $140,000, but 'in that reduced form it still 
goes on and always will go on so long as public high- 
ways are possessed by private greed. 

One hundred thousand dollars a year — ^that isn't 
much. No, but this one little grab has so far cost the 
public nearly $5,000,000 in interest charges, or two 
and a half times the amount the Inside Gentlemen 
scooped in for themselves. 

Just as in the case of the worn-out locomotives, the 
debt that is loaded -upon the concern to make profits 
for the management goes on long after the manage- 
ment has become dust. It is a pleasant thing for the 
directors to make fat leases with themselves, issue 
bonds for their own benefit, endow themselves with 
melons. It is no pleasure to the next generation when, 
these items being included in the railroad capitaliza- 
tion, income must be raised and rates adjusted to meet 
the interest charges they leave behind them. 

C. The Land Grant Railroads. 


We were speaking some pages back about the grants 
the Congress of the United States made of the public 
domain to various railroad projects. One of the most 


insatiable of these railroad cormorants was the North- 
em Pacific. 

This railroad received first and last more than 43,- 
000,000 acres of the people's land. 

The value of this much more than paid the con- 
struction cost, so that the people really built the road 
and then presented it to its projectors. 

This is an understatement. The value of the land 
conferred upon this road will in the end be worth 
more than all of its other possessions together. 

Senator Pettigrew has told how some of this ab- 
normal value came about. When he was in the Senate 
a bill was brought in to establish the national forest 
reserves, a worthy purpose. 

He learned that in the cases of some of the pro- 
jected forest reserves settlers would be so surrounded 
with the reserved land that they would have no ac- 
cess to their property. He therefore had an amend- 
ment offered providing that in such a case a settler 
might exchangox his farm for a similar amount of land 
elsewhere in the public domain. 

While the bill was on passage the railroad attor- 
neys in the Senate had the wording of this amendment 
so changed that any holder of land from the public 
domain, whether settler or not, could exchange his 
holdings for others of equal amount elsewhere. 

This change was forced through by a trick. It was 
withheld until the bill was in conference, after which 
there was no chance for further change or amend- 
ment, and then in the last moment of the session 
rushed through. 

By reason of this iniquity, railroads that held 
among their grants from the public domain long 



stretches of sand barrens or cactus exchanged them 
into public land that bore valuable timber or other 

Among these beneficiarites was the Northern Pa- 
cific, which now holds 9,962,896 acres of land covered 
with valuable white pine — ^valuable now, becoming 
more valuable every day. 

Against these and their always increasing value 
the Northern Pacific is justified, according to the theo- 
ries of railroad executives, in issuing additional capi- 
tal, dollar for dollar of the value of the lands. 

Then rates may be based on capital so created. 

It has already issued $60,000,000 of additional 
capital on these lands, and the public has had so far 
the pleasure of paying $32,000,000 in interest on capi- 
tal so issued — capital based upon the public's own 

At the same time the value of the Northern Paci- 
fic's right of way, also a free gift from the people, 
steadily mounts, and if the railroad executives are 
right it also may be made the basis for further im 
creases in capital and so for further increases in rates. 
In ten years this right of way increased in value from 
$50,000,000 to $175,000,000; it is now worth more 
than $200,000,000. 

Against this the Northern Pacific issued in seven 
years $73,000,000 of additional stock, on which is 
collected from the public every year $5,110,000 of 
interest. In twelve years it issued $112,613,500 of 
additional bonds on which it collected from the public 
$4,504,540 of annual interest. 

It is to furnish increasing interest charges on the 


increasing value of their own free gift that the people 
are called upon to pay increased freight rates. 

First and last this nation has bestowed upon its 
railroads 155,273,560 acres of the public domain. The 
theory of the defenders of our railroad system is, and 
must be, that so fast as this property increases in value 
the railroads may issue securities against it and in- 
crease rates to pay the increased interest charges on 
these always increasing securities. 

The land of the people that Congress has bestowed 
upon private railroad enterprises, amounting to 242,- 
614 square miles, is an area nearly five times as great 
as the entire state of Illinois; it is greater than all 
New England with the states of New York, New Jer- 
sey, Pensylvania, Maryland, Delaware and Virginia 

At the average prices that most of the railroads 
have received for such of these lands as they have 
sold, the money value of this gift is more than one 
billion dollars and amounts to about one-ninth of the 
actual capitalization of all the railroads with the water 
squeezed out. 

Much of this magnificent and unparalleled donation, 
an empire in itself, has been capitalized and the people 
are now paying interest on their own generosity. 

Here are some enterprises that have profited by 
these foolish and unnecessary gifts : 

Land Grant 
Railroad. in Acres. 

Atchison, Topeka & Santa Fe 17,425,300 

Central Pacific (Southern Pacific) 9,379,140 

Chicago, Burlington & Quincy 3,408,046 

Chicago, Milwaukee & St. Paul 4,222,137 

Chicago & Northwestern 4,415,447 


Land Grant 
Railroad. in Acres. 

Chicago, Rock Island & Pacific 1^28,526 

Chicago, St. Paul, Minneapolis & Omaha (North- 
western) 2,645,320 

Choctaw, Oklahoma & Gulf 4Rock Island) 838,400 

Grand Rapids & Indiana 954,373 

lUinois Central 8,920,848 

Missouri, Kansas & Texas 1,121,784 

Mobile & Ohio 3,920,848 

Northern Pacific 43,893,728 

Pere Marquette 689,290 

St. Louis, Iron Mountain & Southern 3,498,578 

St. Paul, Minneapolis & Manitoba 3,770,532 

Seaboard Air Line 1,034,220 

Southern Pacific ^ 14,351,587 

Union Pacific 19,144,394 

Wisconsin Central 1,232,562 

All of these railroads are applicants for increased 
rates and diminished wages. 



The Railroad in Politics and the Government. 

A highway is not onlj' a public institution — always 
and essentially public — ^but it is always a thing con- 
nected with the operations of government, or what is 
called sovereignty. 

This we have seen before, but it is a truth that we 
should always return to when we try to deal with any 
lAase of the railroad problem. 

Whoever owns the highways of a country owns that 
country. We have seen conclusive illustrations of that 
fact in the history of the Southern Pacific in Califor- 
nia, where all pretense of any other actual govern- 
ment was abandoned and the railroad company se- 
lected all public officers, determined legislation, levied 
taxes, made and unmade policies and exercised to the 
full the functions of sovereignty. 

In the end the people of California, long enduring 
like the rest of us, revolted against a condition so 
repulsive to every American tradition and doctrine, 
rose in their might and put an end to the gross and 
lawless tyranny with which they had been oppressed. 

The revolt is celebrated in western history. Yet in 
point of fact the control of California by the satrapy 
of the Southern Pacific was not more complete or ab- 
solute than the control of Pensylvania by the Penn- 
sylvania Railroad or the control of Rhode Island by 


the New Haven. As we have before noted, the control 
of the highways inevitably carries with it the control 
of the government, because the highways are the most 
important thing the government has, and whoever gets 
them gets practically all the rest. Sometimes the rail- 
roads exercised tHeir sovereignty in a crude, frank 
way, as in California, and sometimes with finesse and 
polish, as in New York, but they exercised it every- 
where, and controlling the highways could not have 
done anything else. 

We reach now the case of a railroad that ruled so 
long the political affairs not merely of one state but 
of several that its managers came to think their power 
was unlimited and eternal, and thereby got into 

Their troubles do not concern us here except that 
they illustrate forcibly the general truth of the sov- 
ereign function of the highway and also show again 
and in a different way what this railroad capitaliza- 
tion really is on which rates are based and wages de- 

The Louisville & Nashville is a corporation that 
dates back to 1850. Like the other great railroad com- 
panies of this day, it is an aggregation of many 
smaller enterprises, and whenever it has gathered in 
a new line the union has been cemented by an addi- 
tion to the total capitalization without increasing the 
actual investment in the property. 

It appears that the gentlemen that have conducted 
the Louisville & Nashville were of old familiar with 
other means by which capitalization is increased and 
private fortunes are created at the public expense. So 
far back as 1861, when such things were rare novel- 



ties, the directors declared a stock dividend of i^ of 1 
per cent and, finding this odd little experiment to go 
well, followed it .with another of 10 per cent. What 
has been done since in this field of endeavor is clothed 
in some mystery. The Interstate Commerce Commis- 
sion once tried to pierce the veil,»but the company 
thoughtfully destroyed most of its records and then 
refused to produce most of the rest. The Commis- 
sion's investigators nevertheless found in the office of 
the company a small corporate history of the concern, 
from which it appeared that in the next few years 
there had been cut these delicious melons, all repre- 
senting additions to the capitalization without cor- 
responding investment : 


January 2, 1864 10 

November 16, 1867 ^ 40 

October 6, 1880 100 

January 9, 1888 2 

July 26, 1888 8 

January 9, 1889 2 

July 18, 1889 3 

January 6, 1890 3.9 

July 2, 1890 1.9 

per cent 











Not shown 




When the melon of 100 per cent came to be cut in 
October, 1880, there was no adequate surplus of earif- 
ings to base it upon. In the treasury ^was only 
$3,671,383 of accumulated earnings gathered from ex- 
cessive rates charged to the public and the sum was not 
enough. So the directors took the books and with a 
few deft strokes with the handy pen marked up the 
value of the company's assets until they had added 
$7,212,226 thereto and had enough to base the stock 
dividend of 100 per cent. 



We may well remember that the value thus added 
with pen strokes went immediately into capitaliza- 
tion, is there now and is part of the total upon which 
rates are based and wages determined. So far those 
pen marks have cost the public $1,470,000 directly 
and much more than that indirectly. 

But we started to tell of this railroad as a sovereign 
power. As it grew with the accretion of smaller lines 
it developed a policy of securing at whatsoever cost a 
monopoly of the transportation business in the region 
it traversed. 

The purpose of its managers was to make it the 
Southern Pacific of the South. Hold all the highways 
and charge whatever tolls the people would stand for. 

To do this it went into politics as the Southern Pa- 
cific before it. In a few years it had become the domi- 
nating force and virtual government in three southern 
states and an awe-inspiring influence in others. In 
some of these states it usually controlled political con- 
tentions, had its way in the legislatures, chose the pub- 
lic servants, nominated governors, members of Con- 
gress, Senators, edited newspapers, engineered cam- 

Now and then somebody in the South whose neck 
was abraded by this collar broke away and tried to 
win free from the octopus. Him the railroad picked 
up and slammed upon' the pavement. 

After a few years of this, discerning politicians, ed- 
itors and public servants saw where their interest lay 
and wore the collar without repining. 

In 1913 the thing was a regional scandal and notori- 
ous. The Louisville & Nashville had become in fact 
and practice the only actual government in these 
st^t^s. It w^s the time of the muck-raker, that few- 


some beast. Light was turned upon these conditions, 
and Congress was induced to pass a resolution asking 
the Interstate Commerce Commission to make investi- 
gation of the Louisville & Nashville's political depart- 

It was then that the books were destroyed and the 
sources of information closed. The Commission came 
upon certain indications that for years vast sums of 
money had been spent by this railroad for political 
control. It put upon the stand Mr. M. H. Smith, 
president, and other officers of the Louisville & Nash- 
ville, who refused to answer any questions concerning 
these expenditures. 

The Commission then applied to the courts for an 
order compelling the officers to answer the questions 
put to them. The railroad fought the case to the Su- 
preme Court of the United States, which affirmed the 
decision of the courts below that answers must be 
made. For some reason not now apparent the Commis- 
sion did not press its victory, but agreed with Mr. 
Smith upon some modified questions that he was to 
answer. Whereupon he admitted that the money had 
been spent for political purposes and to influence elec- 
tions and were then charged to "operating expenses," 
where they appear to this day. 

Among these expenditures were sums paid to an 
influential and reputable daily newspaper to hire it 
to advocate the railroad company's pet measures. 

It is to meet "operating expenses" of this kind, with 
others, that rates must be increased to the public and 
wages reduced to the employees. 

To head off restrictive legislation there was formed 
th^ Tennessee Railrofid AasQcifttion, which ^eerns to 


have been, in plain terms, a lobbying and legislator- 
getting device. The Louisville & Nashville paid to it 
at one time $120,000 and at another $130,000. Nearly 
$300,000 worth of vouchers were gathered that were 
without explanation except for "special*' services. Be- 
sides these, vouchers for nearly $70,000 of unexplained 
expenditures were discovered in the legal department. 
Many of the officers of the railroad had "suspense'' 
accounts through which they expended large sums 
that were never explained. Requests for light upon 
these payments were absolutely refused. 

One of the subsidiaries of the Louisville & Nashville 
was the Nashville, Chattanooga & St. Louis, a former 
competitor that it had absorbed. Great sums of money 
were also expended in the name of the Nashville, Chat- 
tanooga & St. Louis without explanation or proper 
voucher, and all information concerning these pay- 
ments was likewise refused. 

It appeared, however, that all of them had been in- 
cluded in the "operating expenses" for the sake of 
which the railroads, including the Louisville & Nash- 
vile, petitioned for increase of rates and argued for 
decrease of wages; 

The Commission's investigators found that evidence 
concerning these expenditures was to be had in the 
company's correspondence files, which the compi^ny 
refused to allow to be examined. The Commission 
again went to the courts for assistance, and when this 
issue in its turn had been fought to the Supreme Court 
of the United States that body held that although the 
law authorized the Commission to compel the produc- 
tion of any railroad's "accounts, records and memo- 



randa/' a railroad's correspondence need not be pro- 

The result of this decision was, of course, to put an 
end to all investigation concerning the political activi- 
ties of any railroad or indeed of anything the railroad 
might wish to conceal. It had but to make its records 
in the shape of letters to an imaginary person and no 
power in the United States could ever disclose themu 

But enough had been learned in the case of the 
Louisville & NashvUle to show clearly the methods by 
which it exercised its sovereign functions over these 
three southern states. 

For instance, the Commission picked up some valu- 
able information about the use of passes to further the 
company's ends in political and legislative matters. 
Although the law had long forbidden the use of these 
passes, it appeared that in one year the Louisville & 
Nashville proper had issued to public officers, attor- 
neys, newspaper representatives and the like 11,805 
free passes, involving 4,577,928 miles of travel, the 
value of which was $130,839. 

It may T)e interesting to follow this and see who re- 
ceived these favors. The passes issued by the Louis- 
ville & Nashville proper were distributed as follows : 

Number of 

Class. passes. Mileage. . Valne. 
Members of legislative bodies 

and other public officials. 6,578 2,155,465 % 61,727.59 

Attorneys 1,402 874,841 24,520.32 

Newspaper representatives.. 2,631 1,119,060 32,246.70 

Various other • persons 1,194 429,062 12,345.04 

Total ^ 11,805 4,577,92? ^f 130,839.66 

*HE Louisville & nashville t^l 

Of these, 1,942 passes were issued to members of 
the legislature and 4,636 at the request of members. 

This seems to indicate sufficiently one of the meth- 
ods by which the Louisville & Nashville, controlling 
the highways, exercised the sovereign power in that 

The recipients of these favors included public offi- 
cers from almost every branch of the public service. 
They were issued as follows : 

Number of 
On account of — . passes. Mileage. . Value. 

United States senator 1 

United States representatives 2 204 $ 6.12 

Other United States officials 139 66,558 1,675.49 

State sen^Jtors 1,556 390,883 11,323.53 

State representatives 2,183 505,201 14,850.06 

Other state officials 1,769 839,567 23,996.36 

County officials 228 167,802 4,674.49 

City officials 611 149,290 4,021.14 

Judges 89 46,460 1,180.40 

Total 6,578 2,155,465 $61,727.59 

This is one year's record and comprises only the 
passes issued by the Louisville & Nashville proper. 
Meantime its subsidiary, the Nashville, Chattanooga 
& St. Louis, was not indifferent to these activities. In 
the same period it issued to or at the request of public 
oflBcers and the like, 22,255 passes, involving 7,133,944 
miles of travel, the value of which was $209,420. 

The distribution of the passes issued that year by 
the Nashville, Chattanooga & St. Louis was as fol- 



Number of 

Clflis. imnnfn Milease. Value. 
Members of lefl^slatiye bodies 

and other public officials. 16,680 5,573^35 1164,524.81 

Attorneys 291 153,261 4,442.81 

Newspaper representatives. . 1,310 348,738 10,006.56 

Various other persons 4,074 1,058^10 30^446.78 

Total 22,255 7^33,944 |209^420.96 

Of which 1,247 were issued to members of the legis- 
lature and 15,333 at their request. 

Those issued on account of public officers were dis- 
tributed thus : 

Number of 

On account of — , passes. Mileage. Value. 

United States senators.. 

United States representatives 

Other United States officials 151 37,757 % 1,097.39 

State senators 5,814 1,788,560 52,961.50 

State representatives 8,439 2,969,038 87,713.06 

Other state officials *. . 1,086 444,158 13,089J29 

County officials 388 130,540 3,700.00 

City officials 532 143,125 4,163.50 

Judges 170 59,957 1,800.07 

Total 16,580 5,573,135 $164,524.81 

At the very time when it was pouring out all this 
free transportation to judges and legislators it was, 
vnth brazen effrontery, beseeching the Interstate Com- 
merce Commission for increased rates and resisting 
the efforts of its employees to obtain a living wage. 

Every mile of free transportation that it gave away 
was, of course, reflected in its "operating receipts" and 
"operating expenses'* that are shown in support of 
both of these efforts. 


It appeared further that the company was accus- 
tomed to make lavish expenditures to maintain its 
transportation monopoly in the region it traversed 
and that these expenditures landed in the accounts as 
^'operating expenses" or the like. 

For instance, there had once been a thriving compe- 
tition carried on by steamboats on the Alabama 
River. To head this off the railroad made an arrange- 
ment with the steamboat company by which the steam- 
boat company advanced its rates to those charged by 
the railroad and then was paid a certain amount each 
year as "minimum freight charges/' whether it car- 
ried any freight or not. 

It seems that news of this delightful arrangement 
must have leaked out, for after a time a new steam- 
boat company was formed and began to carry actual 
freight at actually reduced rates. 

The railroad made short work of this. With its 
steamboat satelites it cut rates until the rival had been 
ruined and then restored them. 

Another rival steamboat line appeared but was 
more adroitly managed. It allowed itself to be ab- 
sorbed at the cost of an increase of capitalization that 
the public must bear. 

For some years quiet reigned on the Alabama. Then 
another band of trouble makers started a new com- 
petitive line. The Louisville & Nashville found a 
man ready to put this out of business and advanced 
money to him on his notes. He built some steamboats 
and ran them at nominal rates until he had ruined 
the competitor. Then the Louisville & Nashville 
charged off his notes as "worthless." 

And thus also is railroad capitalization made. 



The United States srovemment had expended upon 
the Alabama River millions of dollars to make its 
navigation safe and inviting. The Louisville & Nash- 
ville Railroad killed navigation on the Alabama River 
and made the expenditures of the United States gov- 
ernment there all waste and useless. Then the Louis- 
ville & Nashville Railroad petitioned the same United 
States government for leave to increase its rates, hav- 
ing thus killed off water competition. 

In 1890 much more than one-half of the stock capi- 
talization of this railroad was superfluous. 

All the water in its capital that existed in 1890 is 
still there demanding profits, and there have been 
added great sums in capitalized earnings, capitalized 
improvements and the like. 

In 1920, because of this excessive capitalization, and 
for no other reason, the freight rates on this railroad 
were increased more than 25 per cent and the passen- 
ger rates more than 30 per cent. 

In 1922 it joined with other railroads in securing 
from the Railroad Labor Board an order reducing the 
pay of track-walkers, section hands and other workers 
on its lines. 

If the water were excluded from its capitalization, 
if its capital consisted only of money actually and 
legitimately invested in the enterprise, it could carry 
freight and passengers at one-half its present rates 
and pay its track-walkers and section hands a reason- 
able wage. 

Total capitalization, December 30, 1920, $297,520,- 
515, of which $72,000,000 was stock and $225,520,515 
bonds. Mileage operated, 7,695. Interest on bonds, 



But the best illustration of the American railroad 
company as it really is we can find in the story of the 
New York, New Haven & Hartford. 

Whoever will read attentively the record of this road 
need never be deceived again as to the exact terms of 
the American railroad problem. 

He will see clearly the fpur great truths that deter- 
mine the whole subject. Let us restate them here. 

First, that the typical American railroad is not 
an enterprise to transport passengers and goods, but 
an enterprise to- issue, juggle and make profits from 

Second, that it is the issuing of these securities that 
alone has brought the system to a state of wreckage. 

Third, that every dollar of private fortune made by 
the issuing of these securities becomes a tax levied 
upon the public that the public must pay annually in 
higher fares, worse service and increased peril to trav- 

Fourth, that rates are based upon these fictitious 
issues and wages are determined by them, so that 
when the railroad companies come into court and pre- 
tend that they must increase rates to meet wages de- 
mands they are merely faking. If there had been no 
over-issues of securities the railroads of America could 
pay all the wage increases of the last twelve years and 
never increase rates by one cent. 



On the contrary, but for these security issues, rates 
would now be less than one-half the present standards, 
wage increases and all being included. 

If there is a railroad in all the world that ought to 
be operated at a fat profit, it is the New York, New 
Haven & Hartford. It has short hauls, stiff rates and 
an enormous business. In what is called traffic density, 
which means the amount of business by the mile of 
line, it goes beyond any other railroad in the United 
States and almost anywhere else. There may be two 
railroads in England that have a somewhat greater 
traffic density, but that is all. 

It runs through the most thickly settled area in 
America, connects great cities and taps our most im- 
portant manufacturing centers. If a region for rail- 
road profits could be made to order it couldn't be better 
than this. 

Yet this great and wonderful enterprise that ought 
to be so prosperous has been for ten years bumping 
along the shoals of disaster, barely clawing off bank- 
ruptcy and a receivership. The public meantime being 
stung for increased fares, increased rates and impov- 
erished service, and traveling ofteii at a needless risk 
of accident, while the workers find their just demands 
for adequate wages blocked by the plea of this road's 
extreme poverty. 

Poor? How poor? It is by rights one of the rich- 
est corporations in all the world. How, then, does it 
come to be called poor? 

In this way : 

For years and years the New York, New Haven & 
Hartford Railroad Company was esteemed an institu- 
tion as solid as the United States treasury and the 


ideal of a safe, sane and cdhservative business enter- 
prise. It went its way earning good dividends, 
keeping them from becoming too large by judicious 
concessions in rates, and serving fairly well the vast 
population that depended upon it for ^transit, while 
its stock was 200 or more in the market and regarded 
as about equal to a government bond. 

Then its control fell into the hands of a certain band 
of Wall Street financiers Qf the utmost repute and re- 
spectability, whose specialty was the making of for- 
tunes by issuing railroad securities, and it was their 
pursuit of this safe and favorite indoor sport that 
wrought the change in the New York, New Haven & 

In 1904, when they took possession, the capital stock 
of the road was $80,000,000, and the whole of its bond 
issues outstanding amounted to only $34,491,000. 

Of these, $24,852,000 were of the variety of bonds 
that are called "debenture certificates," which is 
chiefly another name for the same thing. 

After seven years of the new control the capital 
stock had been more than doubled and the outstanding 
bonds increased by more than 600 per cent. 

The road could no longer earn the interest and divi- 
dend charges on this vast overcapitalization. 

What was the reason or excuse or pretext for the 
increase that had been made? 

The gentlemen that had secured the ^control of the 
property had entered upon an alluring scheme to gather 
into their own hands all the railroads of New England 
and most of the trolley lines and public service cor- 
porations as well. 

To do this they used the New Haven as their base. 


They issued upon it certain bonds and stocks. With 
these they bought an interurban trolley line. On this 
they issued more securities and used them to buy 
another trolley line. On this they issued more securi- 
ties and used them to buy a gas company. 

Whenever in this pleasant performance they needed 
more securities than the trolley companies or gas com- 
panies could furnish they came back to the good old 
New Haven and loaded it down with some more mil- 
lions. "" 

In this way they secured control of the Boston & 
Maine and had in their fists the entire railroad trans- 
portation business of New England. There was 
hardly a city, town or village on which they could not 
lay tribute. Finally, with securities thus issued, they 
swept into their net the steamboat lines of Long Island 
Sound and disposed of the last chance that their em- 
pire could be assailed by water competition. 

Of every kind of transportation they had the mo- 
nopoly, except walking and horseback riding. The 
sovereign people of New England were still free to 
practice pedestrianism along their highways and go 
as far as they liked. But if they wished to be carried 
in cars or boats they must stand and deliver to the 
Wall Street combination. 

Many of these operations were illegal under the state 
law of Massachusetts or under the Federal law of the 
United States or under both. 

The combination seemed able to secure the indul- 
gence of both State and Federal authorities, for they 
went their way and trampled merrily on both sets of 
laws and assimilated properties and issued more 


securities on the poor old New Haven and had a right 
good time. 

There was also one other trouble that afflicted them. 
There was one man that could not be bribed nor 
bought nor frightened nor bullied but just stood in 
the market place day and night crying out that all 
this was wrong and could end only in disaster. 

The combination had built up an obedient chorus 
of newspapers and writers and owned or controlled 
a vast system of news agencies. All these now covered 
this one man with ridicule and abuse. 

He replied with figures and facts; replied calmly 
and soberly and without feeling. He said that the In- 
siders by these methods had scooped all the interior 
substance out of the New Haven property and what 
was left was a shell. He said the shell would fall over 
next and great would be the fall of it. The railroad 
press and the railroad writers said he was a liar. He 
responded by showing in black and white that the New 
York, New Haven & Hartford was paying dividends 
that it had never earned and coolly inquired how long 
anybody imagined that process could go on without a 
smash. The railroad newspapers said he was crazy. 
He exhibited the railroad's balance sheet. They said 
he was a vile and malicious person trying to undermine 
the country's business and welfare. He pointed to the 
New Haven's receipts and expenditures. 

His name was Louis D. Brandeis. He is now a jus- 
tice of the Supreme Court of the United States. 

He had reason to point to the balance sheet. Here 
is the record of eleven years of the game of financial 
bunco as played up^on this property : 





Capital Debenture Pnnded 

Tear Stock Certificates Debt 

1904 $ 80,000,000 % 24352,000 | 9,639,000 

1905 80,000,000 25,185,800 12,004,000 

1906 83,887,000 70,815,725 20,043,000 

1907 97,080,400 146,965,400 82,339,000 

1908 97,895,700 173,565,750 56^49,000 

1909 100,000,000 175398,875 58,961,000 

1910 144,017,425 173^80,000 58,661,000 

1911 178,298,500 151,593,200 60,961,000 

The total capitalization was in 1904 $114,481,000. 
In 1911 it had become $890,852,200. 

About such increases in railroad capital the rail- 
road press has a trick of saying that they are justified 
because they capitalize the earning power of the prop- 

We may now see how much merit there is in this 

The capitalization of this railroad had been in- 
crease nearly four fold. 

But its earnings had not increased four fold, nor 
three fold nor two fold. From 1904 to 1911 they had 
not increased by one-third. 

Total capitalization had increased 248 per cent; in- 
terest and dividend charges had increased 248 per 
cent. Business had increased only 80 per cent. 

Mr. Brandeis, therefore, was absolutely right. The 
dividends were being paid, not out of the earnings of 
the property but out of the proceeds of the sales of 
more securities. Any man not a candidate for the 
imbecile asylum could see that this process vos^mX 
ultimate wreck* 


The gentlemen of Wall Street that had dug fortunes 
out of the property had with the same spades dug its 

Nevertheless the management continued for some 
time to struggle with a hopeless situation. The prop- 
erty was not earning its dividend and interest charges, 
although (except for Mr. Brandeis) that fact was 
carefully concealed from the public. The management 
was now driven to the course that at some time or 
other the management of almost every other railroad 
in America has followed. 

To get money to meet interest and dividend charges 
on excessive capitalization it skimped 'the expendi- 
tures for the physical upkeep of the road, it gouged 
the public with increased fares and so far as it could 
it gouged its employees. 

All local and suburban rates were increased 25 per 
cent first and then raised again. Through rates were 
raised wherever the Interstate Commerce Commission 
could be induced to allow them. 

This is how the public paid with its pocketbook for 
these amusements. And here is how it paid with its 
blood : 

We will take but two illustrations. I have said that 
the physical upkeep of the road was neglected. In the 
year 1906, $10,096,605, which had been spent unavoid- 
ably on equipment renewals, should have been charged 
to renewal expenses. Instead it was improperly 
charged off to profit and loss so as to make the operat- 
ing profits look big, the dividends seem to be earned 
and the concern to look prosperous. 

When these items had been landed in the profit and 
loss account ^they were next improperly taken care of 


by balandng them against the premiums on the sale 
of more bonds. That is to say, when bonds were is- 
sued and sold for fifty points above par, say^ the extra 
fifty points furnished the screen* behind which these 
bookkeeping tricks were concealed. 

In the same year the usual charge-off for mainte- 
nance was quietly omitted from the balance sheet. 

The directors that year declared and paid the usual 
8 per cent on the capital stock. 

If the usual maintenance charge had been made 
there would not have been enough money to pay these 
dividends— not by $1,171,530. 

So then here we are, cause and effect — ^plain as a 
pike staff. The property had been loaded down with 
securities issued for the benefit of the Insiders and 
their schemes. At last the business done would no 
longer produce the money to pay the interest and divi- 
dend charges on these securities. Therefore, all ex- 
penses were cut to the bone. Track and roadbed were 
neglected. Equipment began to run down. Needed 
repairs were not made. Soon strenuous complaints 
began about the condition of certain places in the 
track. These complaints were conveniently shelved. 
Safety must therefore be sacrificed to dividends, and 
here is the record of some of the results : 

July 12, 1911, the Federal Express, a fast New 
Haven train between Washington and Boston, was 
wrecked at Bridgeport, Connecticut. Twelve persons 
killed; one hundred persons injured. Cause, a defec- 
tive cross-over (switch by which a train passes from 
one track to another) . 

After paying with our pocketbooks we had begun 
to pay with our blood. 


The coroner's verdict held the company criminally 
negligent for maintaining ''inherently dangerous and 
short cro9s-overs on fast express lines." The Inter- 
state Commerce Commission ordered the company to 
abolish such cross-overs. 

October 3, 1912, the Springfield Express was 
wrecked at Westfield, Connecticut. Nine persons 
killed, fifty persons injured. Cause, defective cross- 

The company had ignored the corijner's verdict on 
the Bridgeport disaster and likewise the explicit order 
of the Interstate Commerce Conunission. It had not 
been able to obey this order and support the interest 
charges on the huge over-issue of securities made for 
the benefit ol a scheme of transportation monopoly. 

November 16, 1912, the Merchants Limited, a fast 
and famous train of the New Haven, was wrecked at 
Greens Farms, Connecticut. Twenty-three persons in- 
jured. Cause, defective cross-over. 

June 11, 1913, two express trains were in collision 
at Stamford, Connecticut. Nine persons killed, forty- 
eight persons injured. Cause, defective brakes on one 
of the locomotives. 

Please note. The engineer of this locomotive had 
reported the defect when he returned from his last 
previous trip with it. Reported it in writing to the 
proper authority. No attempt was made to remedy 
the defect. The locomotive, with its brakes in bad 
order, was allowed to go out again — ^this time to smash 
and slay. 

Two weeks later there was an addition to the list 
of its victims. Its engineer died at his home of worry 
and brooding over the s^ccident. He had not b^f n hurt 


in the wreck, but there was an attempt to fasten the 
blame upon him in spite of the written evidence of his 
report. He was one n^an pitted against a great and 
powerful corporation. The struggle seemed utterly 
hopeless, and he gave it up. 

Between June 8, 1911, and November 17, 1912, 
there occurred on the New Haven nine serious wrecks, 
all from causes apparently preventable. 

From November 17, 1912, to June 12, 1913, there 
were four more. The accident ratio, therefore, was 
increasing; the road was always becoming more dan- 

In these disasters thirty-four persons were killed; 
264 persons were injured. Some of the injured vic- 
tims were horribly mutilated. Correspondents said 
that the scenes at the wreck of the Federal Express at 
Bridgeport were like those at a field hospital after a 

Certain cause, certain result. The physical condi- 
tion of the road had been neglected that dividends 
might be paid and interest charges met on a capitaliza- 
tion that had increased 243 per cent in seven years. It 
is not my deduction. The whole thing is in the official 
records. Go to them if you have any doubt of the ac- 
curacy of this sanguinary story. The reports of the 
accident division of the Interstate Commerce Commis- 
sion, for instance. Each of these disasters was inves- 
tigated by the Commission, and some of the findings 
were terrific indictments of the whole system of op- 
erating a public highway for private greed. At one of 
these investigations an Interstate Commerce Commis- 
sioner laid aside his judicial chiH to denounce with 
a wrath that stung and bit the failure of the company 


to take the ordinary precautions for the safety of its 
pasengers. In sonie instances it appeared that old 
wooden cars, about like matchwood, were still in use, 
although the Commission had repeatedly condemned 
them. The company could not buy safe cars and pay 
dividends too. It took the chances on the matchwood 
and paid the dividends. 

In other investigations the fact was revealed that 
the signal system in use upon this grand old railroad, 
most profitable in America, was so antiquated that 
experts laughed at it as a relic of railroad darkness. 
In another it appeared that the track conditions were 
such as to insure accidents. 

Naturally. Turn back to what was said a few 
pages ago about maintenance charges. The manage- 
ment could not keep up the track and meet the interest 
charges on that over-capitalization. It let the track 
slide and paid the interest charges. For that was what 
it was hired to do. That and not flie other. 

But by this time the whole country was aroused and 
the traveling public in a state bordering upon 
hysteria. Not all the press agency and propaganda 
department of the New Haven, wonderfully organized 
as it was, could keep down the rising indignation. 
Some meetings were held to denounce the railroad and 
its reckless management. The columns of some inde- 
pendent newspapers were filled with letters of bitter 
complaint. An increasing number of persons refused 
to risk life or limb on such a railroad and resorted to 
water transit or to trolleys or automobiles. The legal 
warfare against the octopus that had seized the trans- 
portation facilities of New England was revived. It 


was evident that the schemes of the schemers were in 
peril. ^ 

Therefore, they resorted to a device quite familiar 
to men in their situation. T|]iey selected a goat. It 
was the unfortunate president of the road, whose of- 
fense had been a too faithful obedience to the repulsive 
duties laid upon him. They now picked him out, held 
his responsible for all that had gone wrong, and with 
a loud noise fired him. 

Instead, they should have raised his salary and 
loaded him with riches and honors. He had, in fact, 
done marvelously^ well, considering the game he had 
been forced to play. The real wonder was not that 
there were many wrecks on the New Haven^but that 
the road, staggering under the interest charges that 
had been piled upon it, had been able to work at all. An 
increase of 243 per cent in dividends and interest 
charges and of only 30 per cent in business — ^what else 
would happen except wreck? 

How far the process had been carried in this in- 
stance we may judge from one eloquent fact. 

The Insiders now quietly slipped from under the 
colossal load. Without ostentation they disposed of 
their holding while the stock was still near the Jx)p 
notch — about 250. 

Whereupon the dividends ceased, the real condition 
of the property was disclosed, the stock fell to 45 and 
the next great question was whether by any chance 
bankruptcy and a receivership could be avoided. 

Mr. Louis D. Brandeis was abundantly vindicated. 
All he had said about the mismanagement of the prop- 
erty was proved. It appeared that his only error had 
been on the side of restraint. 


But he had muckraked the institution. He had 
shown in black and white the secret operations of 
High Finance. He had stripped great fortune-making 
of the disguise by which it is sought to be dis- 
tinguished from Sixteenth Century piracy, and that 
was and is the unpardonable offense. Some years 
afterward he came to be nominated to a place on tne 
Supreme Court bench of the United States. All the 
power of the Consolidated Interests was put forth to 
prevent his confirmation. For weeks the battle raged 
over him. Against his spotless character and lofty 
attainments not a word could be suggested. In worth 
and learning no man was better equipped for the post. 
It was only said that he was a muckraker, a dangerous 
and pestilential agitator, an assailant of the stability 
of business, and for these reasons the whole force of 
the personal and political influence of Woodrow Wil- 
son, then President of the United States, must be 
stretched to the utmost to get him through. 

In the meantime, the new management of the New 
Haven, no longer obliged to pay dividends out of the 
life of the enterprise, repaired the tracks, scrapped 
the rotten equipment and stopped the accidents. But 
six years after the smashup the property had not re- 
covered from the schemes of the Schemers. With all 
its great business it was still unable to pay dividends 
on its excessive capitalization and with difficulty met 
its fixed interest charges. 

Before they retired, the Insiders of the great and 
daring Scheme t)erformed one little act that ought 
to be set down here as an illustration of the true na- 
ture of the private ownership of public highways. 

The New Haven had always operated its own sleep- 


ing cars, from which it made an amiual profit of $400,- 
000. The Insiders of Wall Street were heavily inter- 
ested in the Pullman company. Before they gave up 
the control of the New Haven they made a contract 
with the Pullman Company by which it took over the 
New Haven^s sleeping car business, and the $400,000 
a year of profit was lost to the New Haven and added 
to the Pullman — ^in which the Insiders retained their 

Such is the story of the wreckage of the best rail- 
road property in the United States if not in the world. 
There are three facts in it that ought never to be for- 
gotten by any citizen of America : 

First, every dollar of capitalization added here to. 
advance the schemes of the Insiders is in the capital- 
ization today. 

Second, the presence of this added capitalization 
makes the New Haven an unprofitable railroad, where- 
as otherwise it would be handsomely profitable. Being 
made in this way unprofitable, the Interstate Comn 
merce Commission allows it to increase its rates to 
cover the deficit thus created, and Congress legislates 
money from the public treasury to tide it over its dif- 

Third, having been thus made unprofitable, it uses 
the fact that it is unprofitable as a reason for unjustly 
reducing the pay of its employees and, when these 
refuse to accept the reduction, puts upon them the 
blame for the crippling of the public service. 

But suppose that from the beginning there had been 
applied to this ihstance alsoxthe ancient principle of 
the highway. Supose that the New York, New Haven 
& Hartford Company had never been regarded other- 


wise than as an agent of the public administering the 
public's thoroughfare. Suppose that all profits in ex- 
cess of a reasonable compensation for this service had 
been returned to the public in the shape of reduced 

What would those rates be now? 

What wages could not the enterprise pay? 

What would be the public's percentage of safety on 
its own highway? 




From all these examples and instances of the Ameri- 
can Railroad as It Really Is, one fact stands out per- 
fectly clear, and of sobering significance. 

All other phases of the railroad problem are unim- 
poi^nt compared with Capitalization. 

Everything else comes backin the end4o only this. 

It is to secure additional revenue to meet additional 
and unnecessary charges on Capitalization, and for 
this alone that railroads seek, by all means fair and 
foul, and are driven to seek, the increase of traffic 
rates and the decrease of workers' wages. * 

It is for this that they rob their maintenance funds, 
neglect repairs, and allow accidents to multiply. 

It is for this that we pay with our purses, our lives. 

If railroad capitalization had been just, reasonable, 
honest, the railroads could have met the wage increases 
of the last ten years and never have felt them. 

If railroad capitalization were just, reasonable, hon- 
est, our railroads could at a profit transport passengers 
and freight at one-half the present charges. 

If railroad capitalization were just, reasonable, hon- 
est, our railroads could maintain the physical condi- 
tion of their properties so that the public could travel 
over their roads with a fair assurance of safety and 
the American railroad would not be notorious as the 
most dangerous in the world. 

But as soon as we mention the fictitious, fraudulent 


or superfluous capitalization of the American rail- 
roads someone shouts that we are talking about "wat- 
ered stock" and. that investigation has proved that 
there is no "watered stock" in the American railroad 

This brings me to a branch of my subject that has a 
peculiar concern for the citizen as well as for the 
householder. I beg serious attention to it. 

No other business enterprise in the world depends 
so much upon the press agent and his propaganda as 
the American Eailroad.* No other propaganda is so 
skillfully handled as railroad propaganda. No other 
propaganda but American railroad propaganda has 
caused a great and intelligent people to believe black 
is white, a lie the truth, and myths to be facts. 

We will now take some of these triumphs of the 
American railroad press agents' art and see how di- 
rectly they come home to the chapters of history we 
have been considering. 

1. That there is no "Water^' in American railroad 

For many years every student of railroad econom- 
ics has been aware of the general condition of too 
much capitalization that we have found, by these ex- 
aminations, to be the rule. 

It is the heart of the railroad problem, but not a 
thing that can easily be brought to the public atten- 

It is dry, it is statistical, it has little of the juice of 
human interest. 

Nevertheless, by slow degrees and by dint of much 
experience, the public at large was beginning to under- 
stand that the capitalization of the railroads was a 


matter of direct and daily interest to every household, 
because rates were based on capitalization and rates 
greatly affected grocer bills, butcher bills, dry goods 
bills and rents, with other things. 

To this improper and indefensible capitalization 
came to be applied the general term of "water," 
which had no very clear meaning but indicated thai 
something was wrong and the public had to pay for it. 

In an evil hour for the cause of railroad emancipa- 
tion Congress was induced to order that a valuation 
be made of the physical properties and things owned, 
or supposed to be owned, by the railroad companies. 

This was a piece of foolishness. To estimate the 
value of any railroad property was a long, tedious 
task. The valuators began at one end of the line and 
went through to the other, often taking years at the 
job, and when they got through values had changed 
so much that the work they had done at the beginning 
was out of date and worthless. 

It was foolish also because physical value has noth- 
ing to do with the railroad question. 

In many instances when the valuation was finished 
it showed that the railroad company owned more prop- 
erty than the total amount of its capitalization. 

At once the railroad press agents, pen valets, news- 
papers, attorneys and propagandists sent forth a 
mighty shout together. 

The railroads of the United States were not over- 
capitalized as the muckrakers and wicked anarchists 
had alleged. Look at the facts ! They, owned more 
property than their capitalization amounted to. In- 
stead of being overcapit^ized they had not capitaliza- 
tion enough. Here was the end of the old story about 


^Vater!" There wasn't a drop of "water'* in Ameri- 
can railroad stocks. 

Diligent reiteration backed with figures as to capi- 
talization and physical valuation convinced the public. 

Behold, then, the rout of the muckraker and the de- 
struction of his illusions. 

As a matter of f act, the physical valuation had no 
possible bearing on the question of "water" in the cap- 

They might as well have counted the weeds by the 

For two reasons: 

In the first place, a railroad is not entitled as a car- 
rier to returns upon the value of what property it may 
own but only to returns upon the money actually in- 
vested in the actual enterprise of carrying the public 
and its goods. 

In the sec€md place, if the value of property owned 
is any basis for capitalization, it must be and is equally 
the basis for rates to be charged to the public. But 
the railroad company does not make the increase in 
the value of its property. That increase is made by 
increase in population. The larger the population, 
therefore, the Wgher the rates would have to be, a doc- 
trine not merely absurd but utterly impossible. 

Supose a man to go into a neW western town, buy 
a comer lot for $100 and open a grocery store. In 
ten years the increase of the population in that town 
has caused the value of his lot to mount until it is 
ivorth $500. 

Nobody pretends that this man has any right to 
charge more for his hams, teas and sugars because his 
lot is worth more. 


But in those ten years the value of the property 
owned by the railroad in that region has increased 
from $5,000,000 to $10,000,000 and this $5,000,000 of 
increased value has been swept up into capitalization 
— stocks and bonds. 

Then the railroad goes before the Interstate Com- 
merce Commission and complains that on this capital- 
ization it cannot with its present rates earn the inter- 
est and dividends. Hence it must increase its rates. 

The difference, therefore, is clear enough. In one 
case the public pays for the increase of value which 
itself has created, and in the other case it does not. 

It was because of the discovery of this increase in 
the value of railroad property that the press agents 
were able to announce that there was no water in the 
American railroad. Yet- if the principle that a rail- 
road is entitled to capitalize the value of its property 
should ever be carried out we should see some very 
strange things in this country. 

For instance, two of the largest holders of white 
pine lands in this country are the Northern Pacific, 
whose ownership we have already examined, and the 
Southern Pacific. 

As our timber supply diminishes, the value of these 
holdings is certain to increase until they shall be worth 
more money than the present total capitalization of 
these railroads. 

If the theory of capitalized values has any merit, 
these railroads will be justified in adding to their cap- 
italization the value of these lands and then demand- 
ing an increase of rates large enough to produce the 
revenue to meet the interest charges on that increased 


That would mean the doubling of all their rates. 

The Northern Pacific, as we have seen, has already 
begun to do this. 

Every year thereafter, as the value of the pine lands 
soared rates would soar no less until they reached a 
condition that would disturb or paralyze the ordinary 
business of life in all the regions where these railroads 
should be the chief means of transit. 

This is the dilemma the theory of capitalizing values 
presents. There is no posible escape from it. If It is 
right to capitalize any railroad values, it is right to 
capitalize all railroad values, and there you are — on 
the rocks. 

Railroad property bought in Chicago for $25,000 in 
1856 is now worth $10,000,000. Next year it may be 
worth $12,000,000; ten years from now $25,000,000. 
If these increases are to be reflected in capitalization 
first and then in rates, the country's increase in popu- 
lation means its ruin. 

The truth is, of course, exactly the doctrine with 
which we started, that the only just capitalization of a 
railroad company is the actual money actually invested 
in its enterprise as a carrier. 

On this it is entitled to a just and reasonable profit. 

Beyond such just and reasonable profit all returns 
from the enterprise belong to the public, whose high- 
way the company has been administering and may best 
be delivered to the public that owns it in the shape of 
reduced rates for transportation. 

We can see now how tremendous were the misfor- 
tunes we brought down upon our heads when we al- 
lowed this safe old rule to be discarded. 

But as to the "water,'* the muckrakers and those 


that insisted that Amerfcan railroad stock was ''wat-^ 
ered" were perfectly right. Not a word in the report 
on physical valuation refuted aQ3rthing they had ever 
said. For more than two generations the American 
railroads had been steadily at wor^ increasing their 
capitalization by fictitious, fraudulent or illegitimate 
additions. Every dollar so added was "water" ; every 
dollar of "water" added to the rate burdens and trans- 
portation troubles of the people. 

To this day every melon that ever was cut by an 
American railroad is still in the capitalization and still 
collecting illegitimate revenue from the public. 

2. That because of the unreasonable demands of 
the organizations of railroad workers and the foolish 
surrender of the government while it was operating 
the railroads, the wages of railroad workers were ad- 
vanced to preposterous figures so that when the com- 
panies on March 20, 1920, resumed the operation of 
the nation's highways an impossible condition con- 
fronted them. The wage bill had grown: so that an 
increase of rates was necessary. The railroad worker 
was paid out of all reason and proportion. 

The facts are that the increases in the pay of rail- 
road wages were not beyond the necessity created by 
the increased cost of living; that when all was done 
they were lower than the average increases secured 
in other lines of wage-earning emplojrment; and that 
the most important of these increases were advocated 
by the railroad presidents and executives before they 
were allowed by the government railroad administra- 
tion. This last fact is not generally known, but is 
the record, nevertheless. The railroad presidents and 
executives pleaded for increased wages because the 


increases in other industries caused by the war were 
drawing away the railroad workers, and the roads 
were sorely threatened with a lack of men to make 
operation possible. 

As to whether railroad wages ever reached in this 
country a level that could be called excessive or un- 
reasonable, that can easily be determined. Mr. Basil 
M. Manly, who is the leading expert of the country 
on wages and wage values, has made an exhaustive 
study of this subject, and his findings make it look 
very different from the assertions Df propaganda. He 
took the average earnings of all railroad employees 
year by year and translated them into the actual or 
purchasing value of the dollar, with this result : 

Average Buying Powet 

Annual Earnings (Basis of DoUar 

of All Employees in 1900) 

1900 $ 667 $567 

1907 641 538 

1913 757 522 

1917 1,000 520 

1921 (Based on rates paid 

Jan.-June) 1,790 662 

1921 (Based on rates paid 

July-Dec.) 1,575 599 

That is to say, the pay of the average railroad 
worker in 1900 was less than $2 a day — ^a startling 

But it was not really much better in 1921, in spite of 
the increases. Mr. Manly, in his admirable work, 
"Are Wages. Too High?" says of this: 

"The mere fact, then, that the buying power of rail- 
road wages in 1921 was $32 higher than the starva- 
tion wages of 1900 cannot be used to prove the ade- 


quacy of present rates of pay. Furthermore, it must 
not be forgotten that these figures do not take account 
of the recent reductions in pay through the revision 
of working rules, the abolition of extra pay for over- 
time, and the illegal practice of sub-contracting main- 
tenance, repairs, and even a part of oiperation. If we 
make proper deductions for these decreases it is abso- 
lutely certain that the average wages of all railroad 
employees today have no greater buying power — are 
of no more real value — ^than the miserly wages paid 
in 1900.'' 

He then gives the f bllowing table, which should put 
an end to all misunderstanding on the subject of rail- 
road wages: 


(bases of purchasing power of the dollar in 1900) 

OB m 

•l t I I 1 1 ll 

1900 ..$M61 $662 $1,004 $604 $698 $311 $641 

1907 1,126 687 960 626 706 811 622 

1918 1,146 658 971 678 695 801 596 

1917 1,062 644 1,022 648 725 813 529 

1921 (a).. 1,057 778 972 751 815 897 786 

1921 (b).. 999 719 909 687 758 842 681 

(a) Based on rates paid Jan.-Juxie. 

(b) Based on rates paid July-Dec. 

On this Mr. Manly comments that the only gains in 
real wages have been secured by those that at the be- 
gining of the period were "so badly underpaid that 


there was nowhere to go but 'up, while tte better paid 
and more highly skilled have been steadily losing 
ground. The engineers, sometimes sneered at as the 
'aristocrats of labor/ are worse off by $162, and the 
conductors by $95 !" 

The investigations of the Interstate Commerce 
Commission confirm Mr. Manly's findings. The Com- 
mission discovered that in July, 1921, the average 
earnings of all railroad employees, including execu- 
tives, general officers, foremen and professional men, 
were at the rate of $1,572 for a full year. Excluding 
executives, professional men, general officers and the 
like, the actual railroad workers were receiving in 
July, 1921, $123 a month, or $1,476 a year. 

This is $100 below the bare level of subsistence, for 
a family of five, estimated in July, 1921, at $1,576 a 
year and about $700 below the "Minimum Comfort 
Budget" as ascertained by the United States Bureau 
of Labor Statistics. 

Mr. Manly quotes these figures and then adds ; 

"Assuming that $1,576 a year, or $131 a month 
(equivalent to $600 a year or $50 a month in the val- 
ues of 1900), is the bare level of subsistence for an 
American family in 1921, we discover that 932,140 
railroad workers, or 57 per cent of the total number 
employed, were earning less than that amount, even 
when we include their overtime earnings. 

"We have not reached bottom yet, for we find on 
digging deeper that 520,634, or 32 per cent of the 
total, are earning less than $100 a month with their 

' "And when we get down to rock bottom we find 217,- 
167 track and section laborers earning only $74 a 


month, or |888 a year. This $888 is worth in the val- 
ues of 1900 only $340, or a little better than A dollar 


It was these men, the track and section laborers, 
earning only $74 a month, whose scanty wages were 
cut by the Railroad Labor Board in its reduction or- 
der of May, 1922 — ^that dividends might be paid and 
interest assured on capitalization piled up in the way 
we have observed in all these chapters. 

The Board urged these workers to accept the cut 
meekly "in a spirit of patriotic common sense," to 
enable the carriers "to get back upon their feet" 

But for exploits such as we have described here and 
the like of which darken every page of American rail- 
road history the carriers would never have been other- 
wise than on their feet. 

To assume that the workers have some kind of patri- 
otic duty to endure with patient resignation the losses 
caused by these plunderings is going pretty far in the 
way of hypocrisy. 

Nothing was said about the patriotic duty of the 
men that made millions from these operations to re- 
turn any part of the loot that wrecked the roads, and 
until there is some movement in that direction I think 
we can well be spared any remarks about the patri- 
otic duty of a section hand to rear his family on $1.8Q 
a day and shut his patriotic mouth. 

8. That the government ownership of railroads, 
approved by the experience of other countries, has 
been tried out here while the war was on and found to 
be a failure. 

There has never been any government ownership of 
railroads here except in the sense that all highways 


properly belong to the government. There were 
twenty-six months of government, operation under 
conditions that amounted to a national scandal. The 
government, by reason of the action of a Congress 
largely made up of railroad attorneys, was compelled 
to pay the companies an annual rental far above their 
value as carriers and above the average earning power 
of most of them, and when under these conditions and 
the abnormal conditions brought about by the war 
there was a deficit from the operation, the railroad 
press of America daily emphasized the fact in black 
type as proof that government ownership was a fail- 

4. That government operation of the railroads was 
wasteful, extravagant and incompetent. 

This is not the place to go into the discussion of this 
subject, which could be handled only in a separate vol- 
ume. But the facts are, as shown conclusively and 
forever^ by the testimony of Mr. McAdoo and Mr. 
Hinds, that the government administration of the rail- 
roads was vastly more economical, efficient and com- 
petent than private management had ever been. 

5. That the government in the period of its ad- 
ministration spent nothing on maintenance of way and 


nothing on keeping up the locomotive and car equip- 
ment, and therefore as soon as the companies resumed 
the control of the property they must spend enormous 
sums on restoring the lines to a state of efficiency. 

"Repairing 'the wreckage the government had 
caused" was the phrase usually applied to this, and 
ingenious cartoons were printed in the railroad lackey 
press illustrating the appalling size and difficulties 
of the job. There never was more breath-taking im- 



pudence. As a matter of fact, there was no wrecK- 
age. The government, in its period of operation, 
greatly improved the physical condition of the rail- 
roads. In the period of government administration 
the expenditures for maintenance, compared with the 
total expenditures for operation, reached the highest 
percentage ever known. 

Under the false belief that the railroads had been 
skimped for maintenanbe under the government ad- 
ministration the country tolerated, in the iniquitous 
Esch-Cummins act, a provision that for six months 
after the resumption of company control the govern- 
ment should guarantee the companies' expenditures 
for repairs and replacements. If the facts as to the 
charges made by the railroad companies under this 
provision ever become generally known there will be 
a greater public scandal than attended the Credit 
Mobilier and Whiskey Ring exposures, fragrant in 

5. That whatever may have been the iniquities of 
railroad exploiters of other days nothing can be done 
now about their misdeeds and the results thereof. 

This assumes the theory of the "innocent pur- 
chaser." The fictitious capital created by all these 
wreckers has passed long ago from their hands and 
been bought in good faith by the general public — 
mostly, it appears, widows and orphans. Oh yes ! — ^and 
school teachers. Poor school teachers, widows and 
orphans are the real owners of the railroads of the 
United States. Would you deprive them of their little 
savings ? They knew nothing about the performances 
of Jay Gould and CoUis P. Huntington and ought not 
to be punished for them. 


This has been dinned so industriously into the 
American consciousness that it probably never ^will 
come out. It is one of the biggest fakes ever put over. 
How many "innocent purchasers" of fictitious rail- 
road securities there are may be gathered by viewing 
a few sample facts. 

All the railroad stocks of all the United States are 
held in 640,000 holdings. Fifty-two per cent of the 
total stock is held by banks, trust companies, trustees, 
voting trusts and other \ railroads. Of the rest, the 
majority of the holdings are in lots of considerable 
size, indicating that they are held by persons of means. 

Banks, trust companies and other railroads are not 
much in the way of objects of commiseration as "inno- 
cent purchasers." 

As to the remainder, the case is clear. Supposing 
them to be, all of them, widows and orphans and 
school teachers in direst poverty, it would be money 
in the pocket of the United States to pension them all 
on the basis of thrice their present income from their 
investments if thereby it could end the impositions at 
present practiced upon it by the private control of its 
public highways. 

It is clear from all this that the present system of 
administering our highways is coming to an end. It 
will not work. The plan of employing corporations to 
do this work for the State has been proved to be not a 
good plan. Invariably the result is that the corpora- 
tion exploits the public for the benefit of a few men 
that secure the control of the enterprise. 

It has in it the seeds of its own death. By no device 
of regulation or supervision can it be kept from over- 
capitalizing itself, and the ultimate and sure result of 


overcapitalization is smash — after soaking the public 
for intolerable tribute. 

What shall we do with our highways, then? 

There is nothing to do with them except to return 
them to the public, to which thgy rightfully belong. 

Propaganda replies to this that private ownership 
can do eversrthing better than the government can 
do it. 

This is another impudent fake. The truth is that 
government can do everything better than private 
ownership can do it. 

Private ownership does not manage the railroads 
of this country well or economically, but very badly 
and wastef ully. 

Mr. Justice Brandeis, when he was a publicist and 
not a Supreme Court Justice, said that the railroads 
of the United States wasted a million dollars a day. 

The railroad executives, with loud laughter, denied 
the charge and said it was the word of a crazy man. 

Then Mr. Brandeis proved his assertion and showed 
that he had underestimated the waste. 

The war control of the railroads followed and 
showed again that he was right. Showed it in spite 
of the extortionate rentals the government was forced 
to pay. 

When Mr. James J. Hill, a short time before his 
death, testified that seven billion dollars would be re- 
quired to put the raili'oads of the United States into a 
condition to handle their traffic he surrendered the 
whole cause of the private ownership of public high- 

The government never made a hash of anything fit 


to be compared with the gigantic failure thus con- 

It is true, of course, that to the public resumption of 
the public's highways there is now this objection, that 
we ought not to load the future with all this fictitious 

If we buy with the bonds of the United States, for 
example, all this water, we simply make it a good and 
sound investment on which the next generation will 
continue to pay the interest as we are paying it now. 

But we are not obliged to do this. 

Return the highways to the people, not on the basis 
of their physical value, which is all bosh, but on the 
basis of the average market value of their stocks over 
a period of years, or on the basis of the actual money 
actually invested in the enterprise. 

Stockholders' money, that is ; not the public's. 

No difficulty is involved in this. A few hours' re- 
view of the financial history of any railroad will show 
what investments have been real and what have been 
phony. Pay for the real, cancel the phony, and resume 
the property. 

Payment in government bonds bearing the low rate 
of interest that the government alone can command is 
the obvious plan. ^ 

However reactionaries may rave and propaganda 
may object, to something like this we are coming. 

The present arrangement about our railroads is for 
the public a huge and costly failure. The only benefits 
derived from it are reaped by a handful of fortune 
makers. It is bringing pur highways to a condition in 
which they will not be workable. Without highways 
the nation cannot exist. No other power is able to res- 


cue us from such an unspeakable disaster except the 
power of government. , 

The only question really involved is whether the 
public, which commands the government, will order 
this to be done now on the basis of reason and right 
or wait until more losses, more tribute, more and bit- 
terer conflicts, more melons, more lootings, more graft, 
more wrecks, more of the grievous daily burdens the 
present mad system lays upon us shall have driven us 
tardily and^with a huge cost to the course of sanity 
we might as well adopt now.